Pakistan Cables’ proposed expansion and financial indicators are the key rating drivers-VIS

October 14, 2019: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity rating of ‘A’ for long term to Pakistan Cables Limited (PCL), while the short term rating is ‘A1’. Meanwhile, Outlook on the assigned ratings is ‘Stable’.

The long term rating of ‘A’ signifies good credit quality; Protection factors are adequate. Risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ signifies high certainty of timely payment; Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.

As per an official press release by the agency on this occasion, the assigned ratings reflect PCL’s position as the leading wire & cable manufacturer in the country, strong brand strength and reputation as a provider of quality cables. Business risk profile is characterized by temporary slowdown in demand on account of lower projected GDP growth, high competition from the informal sector and imports and risk of margin attrition due to currency devaluation.

However, overall business risk profile is supported by stable and growing demand for wires & cables in the long run. Overall corporate governance framework is considered sound as indicated by effective board oversight, stable and professional management team and focus on transparency and disclosures.

Going forward, ratings are dependent on timely completion of proposed expansion while maintaining sound financial indicators.

Volumetric sales of PCL witnessed decrease in FY19 on account of slowdown in economic activity. However, increase in average product prices resulted in modest growth in topline during the year. Overall profitability of the company was reported lower primarily on account of higher marketing and finance costs.

Management anticipates a challenging year ahead from profitability perspective due to sluggish demand, uncertainty in exchange rate and higher borrowings costs. With recovery in GDP growth, the management expects profitability to recover in the medium to long term. Improvement in profitability metrics over time is considered a key rating factor.

Moreover, capitalization indicators have improved in FY19 primarily on account of right share issuance. The company is in the process of expansion of manufacturing facilities which will enhance production capacity in the long run. For this purpose, the management intends to utilize additional long term borrowings, which is expected to lead to an increase in the leverage indicators in the medium term.

Post enhancement of capacity and recovery in demand, management expects financial profile and leverage indicators to improve in the long run. Strengthening of capitalization indicators in line with financial projections will remain a key rating driver.