Pakistan: ratings of four cement companies downgraded

Pakistan: ratings of four cement companies downgraded
Published: 16 December 2008

The Pakistan Credit Rating Agency Limited (PACRA) has downgraded four cement companies and anticipates a difficult operating environment for the cement sector in the foreseeable future.

PACRA views business risk to be on the rise, even though the industry currently enjoys healthy gross margins backed by sustained higher sales’ prices and recent decrease in variable costs. However, an already 20 percent decline in local dispatches and slumping demand expected in the upcoming season are all signals that the local demand is dwindling. Sales in otherwise expanding and lucrative export market are likely to be adversely affected due to the global slowdown, including Pakistan’s export markets – India, Afghanistan and the UAE.

Maple Leaf Cement Factory Limited (MLCFL): The downward adjustment in the ratings is based upon a significant increase in financial risk likely to distress the capital structure, and weakening industry dynamics that are expected to further subdue the performance. Nonetheless, the ratings take into account the demonstrated, strong sponsor support enjoyed by the company in view of its association with a reputed business group. It also reflects the relatively lower business risk afforded by the company on account of its strong franchise and established brand name, diversified product mix, flexible production facility configuration, robust plant design and export-favourable strategic location.

The ratings are dependent upon the company’s ability to strike a balance between minimising erosion of margins and utilise its large capacity by increasing turnover and hence maintaining positive cash flows. Meanwhile, equity support from the sponsors and further deterioration in the financial risk remain critical factors for the ratings.

Pioneer Cement Limited (PCL): The ratings reflect the heightening financial risk of the company, as repeated attempts to re-profile debt have hitherto remained largely unsuccessful. Furthermore, performance prospects are likely to be on the decline as business risk increases industry-wide. Nonetheless, the ratings recognise the company’s current robust sales volumes, established market presence and strategic geographical location favouring exports. Moreover, the demonstrated ability of the sponsors to support the company in times of financial constraints continues to support the ratings.

The ratings remain dependent upon prudent management of the financial risk through debt re-profiling. Simultaneously, PCL’s ability to sustain present export volumes leading to adequate utilisation of its expanded capacity to achieve economies of scales, hence protecting margins, continuing support from the sponsors and any further deterioration in the financial risk remain critical factors far the ratings.

Kohat Cement Company Limited (KCCL): The ratings reflect the mounting business risk for the company underlying its constrained ability to augment profitability through improvement in turnover as the capacity expansion plan fails to materialise in a timely manner. Meanwhile, the financial risk of the company is on the rise due to increasingly higher borrowing costs. Nonetheless, the ratings recognise the company’s relatively low-leveraged capital structure affording it higher risk absorption capacity. These ratings are dependent upon the company’s ability in successfully utilizing its expected expanded capacity for improving margins and cash flows and to capitalise upon its advantageous plant location to enhance turnover, though increasingly difficult in the existing demand dynamics. Meanwhile, deterioration in financial risk profile and continued support from the sponsors remain critical factors.

Dewan Cement Limited (DCL): The ratings reflect a relatively significant deterioration in the financial risk profile of the company as major initiatives to re-profile debt have yet not materialised, leading to renewed urgency to meet contractual obligations. Furthermore, different options being explored by the sponsors to restructure the company’s business model have hitherto remained unsuccessful. Also, in its currently weakened state, the impact of deteriorating cement sector dynamics, is likely to be magnified, specially, in view of subdued sponsor financial strength.