Karachi, June 22, 2022 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Razaque Steels (Private) Limited (RSPL) at ‘BBB-/A-3’ (Triple B Minus/ A-Three). Long term rating of ‘BBB-’ signifies adequate credit quality with protection factors being reasonable and sufficient while risk factors are considered variable. Short term rating of ‘A-3’ signifies satisfactory liquidity factors with good expected certainty of timely payment. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on May 24, 2021.
The ratings assigned to RSPL take into account the business risk of long steel sector which is considered relatively high given its fragmented nature accompanied by prevailing competition and price sensitivity of raw material to exchange rate. On the other hand, the sector continues to be supported by strong sovereign protection through favourable tariff regime. The long-term demand outlook for steel products remains positive given Pakistan’s low existing steel consumption per capita and ongoing strategic construction projects. However, short to medium term outlook is considered moderate in line with escalating inflation and interest rates resulting in potential slowdown in construction and other steel consuming sectors.
As a result of favourable government policies and gradual economic recovery post pandemic crisis, RSPL posted significant growth in its topline during the outgoing year and onwards supported by the industry’s ability to pass increase in raw material prices to end consumers. Due to the volatile nature of steel prices in the international market, margins showed improvement in FY21 in line with higher prices of end-products, high-capacity utilization leading to improved absorption of fixed cost components and inventory gains. However, margins in the ongoing year were impacted due to significant lead time between material ordering and delivery of finished product.
Going forward, with the expected rise in finance cost, improvement in net margins is deemed essential to alleviate pressure on bottom line. In line with growth in business revenues, cash flows have improved; however, the same in terms of total borrowings still remained weak at end-HY22 owing to sizable working capital requirements. Moreover, financing is largely limited to utilization of short-term credit while long term debt is minimal, which provides comfortable debt service coverage.
Further, the ratings factor in liquidity support by improvement of net operating cycle, maintenance of current ratio, no major capital expenditure in the pipeline and continuity of the interest free loan extended by the sponsors. Furthermore, the plan of discontinuation of billet manufacturing facility will result in tapering off half of the working capital requirement; therefore, the leverage indicators are expected to improve going forward. The ratings remain sensitive to downward trend witnessed in margins during HY22 owing to lead-lag in input-output pricing. In addition, the ratings remain dependent on improvement of business margins through operational efficiencies, prudent management of working capital cycle and maintenance of leverage indicators at manageable levels.
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: https://www.vis.com.pk/