ACL Cables PLC

ICRA Lanka reaffirms the issuer rating of [SL]A+ with Stable Outlook for ACL Cables PLC

InstrumentRated Amount
(LKR Mn)
Outstanding Amount
(LKR Mn)
Rating Action
Issuer RatingNANA[SL]A+ with stable outlook eaffirmed

Rating action                                             

ICRA Lanka Limited has reaffirmed the Issuer rating of [SL]A+ (pronounced S L A plus[1]) with Stable outlook for ACL Cables PLC (“ACL”/ “the Company”).

Rationale

ICRA Lanka has taken a consolidated view of ACL Cables PLC and its subsidiaries as a whole, given the significant operational and financial linkages among them. The reaffirmed rating factors in the Group’s strong financial position amidst the dominant market share of the local cable industry with strong brand equity. The Company’s strong distribution dealer network has enabled ACL group to establish a strong presence in the local retail cable market. Moreover, ACL has also been able to secure a leading market share in the utility market due to strong execution track record, quality standards along with relatively high-value additions. The Company has introduced new innovative product categories through its R&D Testing Laboratory. ICRA Lanka also takes into account the experience of the promoters, the Company’s strong track record and reputation in the industry, which have enabled the Company to enjoy steady access to funding from financial institutions. The Company’s professional management team coupled with a better governance structure adds further comfort for the rating.

Although, during Q1FY2021, the financial performance of ACL Group has been affected negatively due to island wide lockdowns amidst the spread of COVID-19 Pandemic, the Group’s overall operation has recovered significantly in Q2FY2021.  ICRA Lanka also views positively the current order book, favouring towards the higher-margin product categories from the utility segment. Going forward also, a higher demand from the utility segment is forecasted amidst the ongoing major line maintenance and rehabilitation programmes of Ceylon Electricity Board (CEB). Moreover, given the expected recovery of the local construction industry, which has a direct bearing on the local cable market and the implementation of new development projects such as development of major road networks, Airport Extension and Port City projects, ACL’s future outlook in the Sri Lankan market remains positive. These apart, the reaffirmed rating also factors in the healthy operating profit margins (OPBITDA margin of 11.1% in FY2020 Vis a Vis 10.2% in H1FY2021) and moderate capital structure (gearing of 0.31x as of 30th Sep 2020).

However, the above rating strengths are partly constrained by the volatility in the global metal prices in the post COVID-19 Pandemic (including Copper, Aluminum and PVC Resins) and the exposure of the Company’s margins due to the same. Moreover, the Company’s operations are exposed to macro-economic and regulatory risks, including changes in interest rates, increases in import duties, etc. Since the Company’s imports form a large portion of sourcing and no formal currency hedging mechanism is in place to mitigate any sharp volatility in exchange rates, ICRA Lanka notes the susceptibility of the Company’s profitability indicators to currency risks. The group has also diversified into renewable energy and recently into sugar plantation industries, with experienced Indian partners, through its fully owned subsidiary, Ceylon Copper (Pvt) Ltd. Though moderate capital support is envisaged toward the new investments during FY2021 (from the subsidiary levels), any adverse operational performance of these investments/projects, would necessitate further funding support from ACL and will also moderate the overall return on capital employed. Hence, ICRA Lanka will continue to monitor the Group’s new diversification initiatives and the corresponding impact on the financial profile of the overall group.

Outlook; Stable

The Stable outlook reflects ICRA Lanka’s expectations that ACL will continue to benefit from its healthy order book position and the limited dependence on short term debt levels.

Credit strengths

Leading market share, new product innovation and brand equity: ACL Group is enjoying a dominant market position in the cable industry with a market share of more than 70% in Sri Lanka (including Kelani Cables PLC). The acquisition of Cable Solutions (Pvt) Ltd, a specialised cable export company, has also helped the Group to further strengthen its market position during FY2021. The Company has been able to maintain a strong brand equity in Sri Lanka owing to the higher quality standards of its product-portfolio and the strong distribution-dealer network. During FY2021, the weaknesses of the competitors in the local cable industry due to COVID-19 Pandemic, have also helped the Company to further increase its market share in the retail cable market. ACL Cables PLC is the only local cable manufacturer with a research and development centre, which has enabled the Company to diversify its product portfolio over the past. As a result, ACL is also capable of manufacturing cables and conductors, which adhere to the British Standard (BS) as well as the National French Standard.

Experience of the promoter/s and the management: The Company and the Group as a whole have been driven by the rich promoter-experience and the strong and experienced management team in place, which have guided the Company through several business cycles. The Company has a relatively strong corporate structure in place with well-planned management policies and good corporate governance structure. This has ensured the business continuity over the past several decades.

Healthy demand dynamics:  Ceylon Electricity Board (CEB) is the single largest customer of ACL Cables PLC. CEB’s present tendering process favours the local cable manufacturers with high level of value addition. Hence, ACL being a reliable and technologically advanced cable manufacturer (with R&D facility), has been able to secure major electrification contracts from CEB over the past several years.  During CY2021, CEB as a policy has decided to source its elelctrical cable requirements only from the local suppliers. Thus, ACL Cables being the preferred cable contractor/supplier to the CEB, is expected to benefit from the same. The Company’s utility segment has performed well during the past few years due to increased demand for ABC Cables (Aerial Bundle Cables). Although, Sri Lanka has already achieved ~100% access to electricity, the cable demand from CEB is expected to further increase going forward due to the replacement and maintenance requirements of CEB’s power distribution system with the ABC cables, which have higher conductivity than conventional aluminium  conductors.

Given the Company’s realigned new distribution network, the Company’s retail cable segment has also performed relatively well (compared with other segments) during past two years. This has been further supported by the weaknesses of some competitors of this segment during this period. Moreover, ACL Cables has also been expanding its presence in the export market by exporting to countries such as Maldives, Mauritius, Bangladesh, Australia and few African countries.

Diversification into new business segments: The rating also considers positively the Company’s recent investments such as renewable power and sugar plantations. During H1FY2021, Resus Energy has performed well amidst the favourable weather conditions that prevailed during this period in the country. Moreover, going forward, Resus Energy is expected to perform well with the diversification into solar power segment.  The sugar manufacturing operation is also expected to be carried out in Q4FY2021. Moreover, this operation is expected to be further diversified into the distillery industry going forward. The Company intends to support this operation through its fully owned subsidiary- Ceylon Copper (Pvt) Ltd. ICRA Lanka will continue to monitor the financial performance of these investments and the ability of the management to attain its return targets without further capital outlays than previously envisaged.

Healthy financial profile: ACL Group’s revenue has increased at a compounded annual growth rate of ~10% over the last five years (FY2015-FY2020). However, during FY2020 and H1FY2021, the Group’s revenue has increased YOY by only 3.1% and 1.7 %( annualized basis) respectively. This is largely attributabole to the exceptional events that  took place during this period. The increase in operating profit margins during FY2020 and H1FY2021 was mainly on account of reduced global metal prices, as well as efficiency improvement measures of the Group. ACL Group has recorded a PAT of LKR 481 Mn and LKR 1,024 Mn in H1FY2021 and FY2020 respectively compared to LKR 624 Mn in FY2019. The Group’s capital structure  remains comfortable with the gearing level of 0.5(x) and 0.3(x) in FY2020 and H1FY2021 respectively. The debt profile of the Company is largely skewed towards short term loans, with the same contributing to the majority of outstanding debt levels in H1FY2021. ACL’s coverage metrics have also improved   on account of reduced debt levels in H1FY2021. However, going forward, ICRA Lanka forecasts a moderation of profitability margins amidst the increasing global metal prices and weaker macro-economic conditions post COVID-19 Pandemic.

Credit challenges

Price volatility in global metal prices: ACL Cables PLC’s profitability is directly correlated with the global copper/aluminium prices, which have increased sharply post COVID-19 Pandemic. The Company has only limited options to mitigate the risk of raw material price volatility. Generally, the Company does not enter into any commodity hedging arrangements. Nevertheless, the Company enters into price-locking agreements for confirmed long term orders from CEB (when the raw material prices are increasing). Generally, the Company would pass-through the raw material cost increases onto end customers especially in the retail/institutional segments. However, the revision of sales prices (due to raw material price increases) is generally effected with a time lag, and the same is largely dependent on the prevalent market conditions. Therefore, the Company’s profitability margins are likely to be affected to an extent during such periods. Conversely, in the event of reducing global metal prices, the Company’s sales prices (especially in the retail segment) are generally not revised and therefore, the Company’s profitability margins are expected to noticeably increase during such periods. The ability of the management to successfully manage the raw material price cycles post COVID-19 Pandemic and minimize the impact from adverse price movements, will remain as a rating sensitivity to the reaffirmed rating.

Macro-economic outlook and government policies; Since the demand for the Company’s key product categories are driven by the growth in the local construction industry, the macro-economic conditions such as depreciation of Sri Lankan rupee and other policy directives of the government on this industry would likely have an impact on the overall performance of the Group. Although, the importation of cables is highly restricted by the SL government due to national security concerns, in the event, the government reverses its policy, resulting in increased imports, ACL Cables would face increasing price competition and the threat of imports from new incumbents and foreign cable manufacturers and remains a rating sensitivity to the reaffirmed rating. Moreover, during past two years, Sri Lankan rupee has depreciated noticeably, exerting additional pressure on the Company’s profitability margins during this period.  This has also compelled the Company to change its working capital financing arrangements, resulting in significantly increased short term debt levels in FY2019 and FY2020. However, given the stabilization of Sri Lankan rupee with the stringent import restrictions post COVID-19 Pandemic, the Company has limited its dependence on short term debts to a larger extent in Q2FY2020. The ability of the Company to reduce its short term debt levels, while successfully managing the forex risks remain a rating sensitivity to the reaffirmed rating.  

Increasing working capital intensity; the Company’s overall trade debtor levels during FY2020 and H1FY2021, have increased due to several reasons; relatively larger exposures to ECB segment, (wherein the trade receivables under this segment are generally settled beyond 90 days), weaker macro-economic conditions post COVID-19 Pandemic and the Company’s new distribution channel system.  However, during Q2FY2021, the Company has been able to collect a larger portion of trade receivables with the recovery of the overall operations. The ability of the Company to manage the trade debtors, while achieving the revenue targets, remains a concern amidst the current weaker macro-economic conditions of Sri Lanka.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria: : https://www.icralanka.com/issuer-rating-methodology/

About the Company:

ACL Cables PLC was founded in 1962. The Company was formerly known as Associated Cables Ltd and changed its name to ACL Cables PLC in 1990. ACL Cables PLC is engaged in the manufacture and sale of cables and electrical conductors both in Sri Lanka, as well as internationally.  Being the market leader and having acquired the second largest manufacturer of cables in the year 1998, ACL today, is a Group of cable manufacturing companies holding a robust 70% market share of the local cable industry. Kelani Cables PLC, a subsidiary of ACL Group, the second-largest cable and conductor manufacturer in Sri Lanka, was owned and managed by OLEX Cables of Pacific Dunlop Group of Australia till the year 1998. ACL Group owns 65.2% and 31.71% stakes in ACL Plastic PLC and Resus Energy PLC respectively.  

Key consolidated financial indicators (audited)

Figs are in LKR MnFY16FY17FY18FY19FY20H1FY21
Operating Income12,85614,72216,36818,28318,8439,583
OPBDITA2,0932,2341,6241,638   2,099.6         978.8
PAT1,2691,2557636241,024.2481.5
ROCE (%)17%16%11%9%11%9%
Total Debt2,6472,7953,0826,4856,3214,086
Networth+MI9,47210,46711,57411,82511,94011,942
Gearing (times)0.30.30.30.5         0.49           0.31
OPBDITA/Interest & Finance Charges66.53.62.62.903.61
NCA/Total Debt (%)51%47%26%10%18%21%
Total Debt/OPBDITA (times)1.31.31.9           4.003.012.09

Note; Gearing-(Total debts/ Networth)


[1] For complete rating scale and definitions please refer to ICRA Lanka’s Website www.icralanka.com or other ICRA Rating Publications

Analyst

Danushka Perera
Head of Corporate Sector Ratings
+94-11-4339907
danushka@icralanka.com

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