Press Release
VIS Maintains Ratings of International Steels Limited
Karachi, October 20, 2020: VIS Credit Rating Company Limited has maintained the entity ratings of ‘A+/A-1’ (Single A Plus/A-One) assigned to International Steels Limited (ISL). The long term rating signifies good credit quality with adequate protection factors. Risk may vary slightly from time to time because of economic conditions. Short term rating of ‘A-1’ depicts high certainty of timely payment where liquidity factors are excellent and supported by good fundamental protection and minor risk factors. Outlook on the assigned ratings has been placed on ‘Rating Watch-Negative’ status. Previous rating action was announced on June 21, 2019.
The ratings take into consideration the market driven declining trend in gross margins over a timeline, as a result of which the company’s cash flow coverage indicators have been impacted. The adverse trend noted in FY20, can be attributed to a sizable GIDC charge and pandemic-induced slowdown, which have weighed on the margin and topline respectively. The company’s capacity utilization dropped notably in both major product lines. As a result, the topline contracted by 16%, and gross margins reduced from 11.7% to 8.8%, significantly lower on a timeline (FY18: 15.9%; FY17: 17.5%). While topline may depict some recovery in the ongoing year, market dynamics suggest that the pressure on margins is likely to continue. Given the aforementioned mentioned drop in margins, the cash flow coverage indicators, i.e. FFO-Debt and DSCR, have reduced. Furthermore, capitalization ratios, such as gearing & leverage have also increased and stand on the higher side. Accordingly, the ratings have been placed on ‘Rating Watch-Negative’ outlook.
The ratings continue to factor in ISL’s dominant market positioning in the flat steel industry, representing half of the industry capacity. With operational track record of more than a decade, ISL remains a renowned brand in the domestic market. In the outgoing year, some positive developments were also noted, which included sizable increase in export sales from Rs. 4b to Rs. 9b, which diluted the drop in topline from 25% to 16%, while also adding diversification to the sales mix; going forward, we will continue to monitor this trend from a consistency perspective.
The steel industry has been notably affected by the pandemic-induced slowdown; with the second wave of Covid-19 already starting in EU, there is uncertainty with regards to future industry trends. VIS will continue to monitor key financial trends of ISL, and ratings may be revised, if further deterioration is noted.
For further information on this rating announcement, please contact Mr. Javed Callea (Ext: 201) or Mr. Arsal Ayub (Ext: 215) at 021-35311861-71 or fax to 021-35311872-3.
Javed Callea
Advisor
Applicable Rating Criteria: Industrial Corporates (May 2019)
https://www.vis.com.pk/kc-meth.aspx