Lahore, February 20, 2019 (PPI-OT): Industry headwinds, intensified by weakening domestic currency, widening fiscal imbalance, rising inflation and dwindling foreign exchange reserves have negatively impacted industry players. Pakistan’s household appliances sector is largely dependent on global raw material prices, making it susceptible to external dynamics. Challenging economic conditions and transition of current government have proved to be a serious impediment to industry growth. This is reflected by lower production across major categories of household appliances during 11MCY18. The highest impact was witnessed in refrigerator production which fell by 11% YoY, followed by television sets (-8%) and deep freezers (-5%).
The ratings reflect PEL’s diversified revenue stream and strong presence in Appliances and Power products market. The Company, while aiming brand expansion, has continued to focus on enhancing actual production in the revenue generating products with introduction of new products (TV and Water Dispenser). However, strong competition and slowdown in Power division led to a decline in sales, in 9MCY18. The Company could not completely pass on the increased raw material costs which squeezed its margin and impacted profitability.
The Company’s cash flows came under pressure and coupled with larger quantum of borrowings, deteriorated the coverage ratio. PEL’s capital structure is characterized by intermediate leverage due to new financing obtained to support inclining business volumes. High working capital needs emanating from long inventory and receivable cycle expose the company to financial risk. Additionally, the Company is in the process of issuing a Commercial Paper to finance working capital requirements.
The ratings take in to account strong business dynamics in Appliances and Power segments. Any further deterioration in margins, in turn, profitability may impact the ratings adversely. The Company’s ability to strengthen its business profile by improving volumetric sales remains critical. Meanwhile, close monitoring of working capital requirements and debt servicing capacity remain imperative. Maintaining strong coverages and managing financial risk prudently is crucial for the ratings.
For more information, contact:
Analyst
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425
Email: hammad.rashid@pacra.com
Web: www.pacra.com