Karachi, March 01, 2019 (PPI-OT): VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of ‘A/A-1’ (Single A/A-One) to Agha Steel Industries (ASIL). Rating of the outstanding Sukuk has also been reaffirmed at ‘A+’ (Single A Plus). Outlook on the assigned ratings is ‘Stable’. Long Term Rating of A+ reflects good credit quality, adequate protection factors. Risk factors may vary with possible changes in the economy. Short Term Rating of A-1 indicates high certainty of timely payment, excellent liquidity factors supported by good fundamental protection factors and risk factors are minor. Previous entity rating action was announced on December 5, 2017 while the last rating of the Sukuk was announced on August 24, 2018.
Assigned ratings incorporate ASIL’s position amongst the top-tier players in the long steel sector and competitive advantage stemming from utilization of Electric Arc Furnace for billet manufacturing. Reaffirmation of ratings also incorporate cushion in debt servicing with limited debt repayments over the next two years. Ratings are constrained by current weak sector dynamics due to slowdown in demand and sizeable capacities coming online and elevated leverage indicators due to sizeable debt drawdown for BMR and higher working capital requirements. Ratings remain dependent on projected improvement in financial profile including strengthening of capitalization and liquidity indicators. ASIL’s recently completed BMR along with planned capital enhancement are expected to facilitate in this regard.
ASIL has an installed capacity of billets and reinforcement bars (rebars) at 450,000MT and 250,000MT, respectively. The company completed Phase I of its expansion which involved BMR of existing facility and enhanced billets and rebar capacity by 200,000MT and 100,000MT respectively. The second phase of expansion involves installation of Danieli’s direct rolling mill (MI.DA® Plant) which shall increase rolling capacity to 650,000MT. Phase II is expected to come online by mid-2020. Capacity utilization level of bars was reported on the higher side at 92% (FY17: 91%) during FY18 but has witnessed a noticeable decline in the ongoing year.
Overall sectoral risk is considered high given the fragmented and cyclical nature of industry, slowdown in demand, increase in competition post capacity expansion by established existing and new players and significant reliance on duty protection. While dumping margins have reduced given significant rupee depreciation, risk of dumping from China is considered moderate given supply constraints due to ban on use of induction furnace in China. Going forward, VIS expects demand growth to remain subdued in the short-term in line with slower economic growth in the backdrop of increasing interest rates and sizeable current account deficit. However, demand outlook over the medium to long-term is expected to remain healthy given focus of the government on construction of dams and housing units.
Assessment of financial risk profile incorporates weakening in profitability, liquidity and capitalization indicators during the ongoing year. Overall profitability declined in the ongoing year due to slowdown in volumetric sales and significant jump in financial charges. Consequently, Cash flow coverage of outstanding debt has declined. Future financial profile remains contingent on improvement in demand and quantum of cost savings realized post BMR while financial charges will continue to drag overall profitability. Continuity of current financial profile will exert pressure on ratings.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: http://jcrvis.com.pk/