VIS Maintains Entity Ratings of Procon Engineering (Private) Limited

Karachi, January 26, 2023 (PPI-OT):VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Procon Engineering (Pvt.) Limited (‘PEPL’ or ‘the Company’) at ‘A/A-2’ (Single A /A-Two). Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. Long term entity 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-2’ indicates good certainty of timely payment, liquidity factors and company fundamental factors are sound. Previous rating action was announced on October 21, 2021.

Assigned ratings incorporates sponsor support of Master Group (the Group), a well-diversified conglomerate. The Group has, from time to time, exhibited support through extension of interest-free loans. Ratings take into account strong market position of the Company, with PEPL being the sole supplier of seats to Honda Atlas Cars and fulfilling around two-fourth of the supply of automotive items to two other major market players in auto industry.

While this also exposes the Company to concentration risk, the track record of ongoing association with these customers provides comfort. VIS classifies business risk profile of PEPL in the high to medium category, given historical volatility in gross margins, which varies with volumetric offtake. Furthermore, the business risk profile also incorporates exchange rate risk, cyclicality in auto sales due to slow down in GDP growth and political uncertainty. The Company’s bottom line is supported by continuous dividend income from Master Wind Energy, which has been incorporated.

The revision in rating outlook takes into account depressed sales outlook for PEPL’s downstream industry i.e. automobile sector, which is likely to post adverse offtake numbers in FY23. Given import restrictions, requests for new part designs have increased notably YoY, which is expected to bear dividends starting FY24. Nevertheless, materialization of these revenues will depend on availability of raw material, majority of which is imported. Cognizant of the significant dependence on automobile industry, the Company has diversified its business risk by getting into other product lines such as non-woven fabric, foam seats, foam and spring mattresses, sheets and finished foam. The Foaming and Syntactic (F and S) division is producing a fabric used in the making of pampers, face masks, and some agricultural activities as well as safety gowns used in health care. F and S division accounted for ~18% of gross sales in FY22. As per management, with increased focus on F and S division, revenues are projected to notably increase in the ongoing year.

Given the uptick in debt, the Company’s cash flow coverage indicators have come under stress, with both cash flow coverage of debt and debt service coverage ratio contracting during Q1’FY23. Given likely elongation of slower offtake into Q2 and Q3’FY23 and further increase in benchmark rate in Nov’22 and Jan’22, the debt service coverage ratio is expected to come under further stress during the ongoing year. Despite strong growth in profitability, which was fully retained into the business, the relative increase in quantum of debt has been higher, as a result of which the Company’s gearing ratio has increased on a timeline. As per management, gearing ratio will be brought down to 1.6x by end-FY23. VIS expects this to be a challenging task and accordingly will continue to monitor changes in the same on an ongoing basis. The assigned rating remains dependent on maintenance of business and financial risk metrics in line with threshold for the assigned rating.

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/