Press Release

VIS Reaffirms Entity Ratings of Razaque Steels (Private) Limited

Karachi, March 9, 2020: 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 and with expected certainty of timely payment. Outlook on the assigned ratings is ‘Stable’.

In tandem with our outlook, steel sector off-take has been affected, given demand slowdown in its most pertinent downstream industry i.e. the construction sector. Given direct linkage with construction, wherein RSPL operates, continued to contract through FY19 and 1H’FY20. Depressed demand dynamics are also evident from steel & steel related imports, which have also contracted during the period. Resultantly, volumetric off take of RSPL has also been affected while gross margins have also come under pressure. In the ongoing year, owing to price increase, gross margins have improved while volumetric off take was also relatively better than SPLY, which is viewed positively.

Amidst a challenging industry environment, where larger players are facing capacity under-utilization issue, RSPL continues to run at almost full capacity. Nevertheless, the company has been affected by delays in trade receipts, translating in an elongation of the cash conversion cycle. As a result of the same, working capital requirement and reliance on short-term borrowings has increased, thus increasing the company’s gearing and leverage. The payment delays pertain to ongoing CPEC related projects, wherein the impediment is the project delay and the circular debt. Accordingly, the counterparties have been reviewed, wherein credit quality is considered sound. Nevertheless, the continuous increase in trade debts is a source of concern. At present, the adjusted gearing and leverage remains within the threshold for the assigned rating.

In terms of profitability, the gross margin in FY19 was too low, as a result of which the bottom line was reported in the red. Cognizant of the depressed profitability the sponsors have been proactive in demonstrating support to the company, by increasing interest -free funding to the company by Rs. 166m during the 1½ year period (Jul’18-Dec’19), while also not taking out any dividends. As per management, going forward, dividend payouts will continue to be low and sponsor loans will be retained in the business, till business environment improves.

For further information on this rating announcement, please contact the undersigned (Ext: 207) at 021-35311861-71 or fax to 021-35311872-3.

Jamal Abbas Zaidi

Applicable Rating Criteria: Industrial Corporates (April, 2019)

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 not an NRSRO and its credit ratings are not NRSRO credit ratings.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 2020 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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