Press Release

VIS Assigns Initial Entity Ratings to Frontier Ceramics Limited

Karachi, August 19, 2022: VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘BBB/A-3’ (Triple B /A-Three) to Frontier Ceramics Limited (FCL). The medium to long-term rating of ‘BBB’ denotes adequate credit quality coupled with reasonable protection factors. Moreover, risk factors are considered variable if changes occur in the economy. The short-term rating of ‘A-3’ denotes timely payment of obligations coupled with satisfactory company fundamental and liquidity factors. Outlook on the assigned ratings is ‘Stable’.
The ratings assigned to FCL take into account the company’s association with Khalid & Khalid Holdings (KKH) with business interests in construction, automobiles and industrial equipment. The ratings incorporate moderate business risk profile underpinned by operating dynamics of the industry involving mitigation of foreign exchange and price volatility risks in imported raw material procurement coupled with indirect exposure to regulatory risk on account of frequent changes in regulatory framework of related sectors, primarily construction. On the other hand, heavy custom duties are imposed on import of tiles to safeguard the interests of the local producers by creating higher price differential. The current prospects of construction & allied sectors are optimistic in line with extension of the amnesty scheme launched under the prime minister’s package for the construction industry under which the projects registered must be completed by end-Sep’23.

Stemming from favorable business environment in the medium-term, the financial risk profile of the company exhibited sizable improvement marked by positive momentum in revenues, enhanced margins, healthy profitability indicators and augmentation of equity base. Gross margins improved notably during the ongoing year on account of economies of scale leading to better absorption of fixed cost components and higher average rates of end products. While cash flow generation of the business remains adequate to meet outstanding liabilities, deployment of funds in illiquid assets along with balance sheet mismatch may exert pressure on the liquidity profile of the company. Recent restructuring of related-party loans is also reflective of liquidity stress and remains a key rating concern for VIS. Capitalization profile of the company is supported by a higher dependence on supplier’s credit for working capital support, leading to zero reliance on short term borrowings resulting in lower gearing levels. However, debt leverage continues to remain high in line with increase in quantum of trade payables. The recent expansion in the scale of operations by set-up of new tile manufacturing plant which will almost double the operational capacity of the company is expected to bode well, given positive outlook on the sector, however, the ratings remain sensitive to company’s exposure to volatility in raw material prices and energy costs, more so, in the wake of current Ukraine crisis, which could adversely impact the bottom line.

For further information on this rating announcement, please contact Ms. Maham Qasim (042-35723411-13, Ext. 8010) and/or the undersigned at 021-35311861-66 or email at info@vis.com.pk .

Faryal Ahmad Faheem
Deputy CEO

Applicable rating criterion: Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2022 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .