November 11, 2020: VIS Credit Rating Company Ltd. has maintained entity ratings of Power Cement Limited (PCL) at A-/A-2 (Single A Minus/A-Two). Bank loan rating (blr) of PCL’s secured syndicated bank loan facility of Rs. 16.2billion obtained to fund Line 3 expansion of 7,700 Tonnes per day has also been maintained at ‘A (blr)’ (Single A (blr)).
Outlook on the assigned ratings has been revised from ‘Negative’ to ‘Stable’. The previous rating action was announced on October 25, 2019.
Revision in rating outlook reflects improving trend in macroeconomic indicators and resultant impact on sector dynamics along with restructuring of long-term debt repayments. Ratings remain underpinned by PCL’s demonstrated track record of support from parent entity and sponsor family reflected in the provision of interest-free sponsor loan in the past, project cost overrun support and debt payment shortfall support provided for line III expansion.
Ratings positively incorporate increase in market share during ongoing fiscal year. However, ratings are constrained by elevated leverage indicators which are expected to reduce with debt repayment. Business risk profile incorporates cyclical nature of the cement industry. Given government's focus on construction of dams and housing, cement demand is expected to recover in the medium term. Low coal prices and interest rates are important for maintaining profitability of the industry.
Given higher market share and improvement in gross margins post commencement of line III expansion, revenues and profitability have improved during ongoing fiscal year.
Sales mix is projected to be supported by export market. However, rising overhead and marketing expenses are likely to remain a constraint on company’s profitability and cash flows. Repayment of long-term debt has been restructured such that first repayment of Rs. 1.5b that was scheduled for January 2021 will now commence in July 2023 (grace period of 2 years).
Given limited principal repayments over next two years, debt servicing coverage is expected remain satisfactory. Assigned ratings are underpinned with the contingent sponsors’ support for debt servicing and realization of higher market share and gross margins commensurate with the new plant efficiencies.
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