ICRA Lanka reaffirms the issuer rating of [SL]A+ with Stable Outlook for ACL Cables PLC
|Instrument*||Current Rated Amount (LKR Mn)||Rating Action|
|Issuer Rating||N/A||[SL]A+ with stable outlook reaffirmed|
ICRA Lanka Limited, Subsidiary of ICRA Limited, group Company of Moody’s Investors Service has reaffirmed the Issuer rating of [SL]A+ (pronounced S L A plus) with Stable outlook for ACL Cables PLC (“ACL”/“the Company”).
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 Company’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 such as covered-cables, fire resistant/low voltage transmission cables 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 to the rating. Although, during FY2019, the institutional segment has experienced a slowdown due to weaker macro-economic conditions, other key segments such as Utility, Retail & Distribution and Export segments have performed well during this period, due to ongoing strong order book position. ICRA Lanka also views postively 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 Colombo Light Rail, Megapolis and Port City projects, ACL’s future outlook in the Sri Lankan operation remains positive. These apart, the reaffirmed rating also factors in the healthy operating profit margins (OPBITDA margin of 9.0% in FY2019 Vis a Vis 9.9% in FY2018) and moderate capital structure (gearing of 0.5x as of FYE Mar 2019) despite the increase in debt levels in FY2019.
However, the above rating strengths are partly constrained by the volatility in the global metal prices (including Copper, Aluminum and PVC Resins) and the exposure of the Company’s margins 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 Company’s short term debt levels have increased sharply in FY2019 as the Company’s working capital requirements were largely financed through short term loan facilities (from availed creditors) during this period due to the sharp devaluation of LKR. However, during FY2020, given the current stabilization of LKR, the Company intends to limit its dependence on short-term working capital debts and revert to availing credits from its suppliers. Therefore, ICRA Lanka forecasts a meaningful reduction in the total working capital debts in the short to medium term.
The group has also diversified into renewable energy and recently into sugar plantation industries, with experienced German and Indian partners, through its fully owned subsidiary, Ceylon Copper (Pvt) Ltd. Though a moderate capital support is envisaged towards these new investments during FY2020 (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.
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 the short term debt levels.
Leading market share, new product innovation and brand equity: ACL Cables PLC 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 Kelani Cables PLC has helped the Group to further strengthen its market position. 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 FY2019, the weaknesses of the competitors in the local cable industry, 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. Thus, ACL Cables enjoys the competitive advantage of being the preferred cable contractor/supplier by the state authorities and private institutions.
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 has guided the Company through several business cycles. The Company has a relatively strong corporate structure in place with well-planned succession management policies and also has a better 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 highest 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. 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 has higher conductivity than conventional aluminium conductors.
Given the Company’s realigned new distribution network during FY2019, the Company’s retail cable segment has performed well during this period. This was further supported by the weaknesses of some competitors of this segment during this period. Moreover, ACL Cables has also been expanding its presence globally by exporting mainly to countries such as Maldives, Mauritius, Bangladesh, Australia and few African countries. Although, the Company’s institutional segment has slowed during FY2019 due to weaker macro-economic conditions that prevailed during this period, going forward, this segment is expected to perform well with the revival of the Sri Lankan economy. The proposed mega-development projects such as the Colombo Light Rail Transport Project, Megapolis Development Plan and Port City Project, would augur well for the Company going forward.
Diversification into new business segments: The rating also considers positively the Company’s recent investments such as renewable power generation and sugar plantations. During FY19, 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 expected to be carried out in FY2020. Moreover, this operation is expected to be further diversified into the distillery industry. Therefore, the Company intends to further support this operation through its fully owned subsidiary- Ceylon Copper (Pvt) Ltd. ICRA Lanka will continue to monitor the financial performance of this investment and therefore, the ability of the management to attain its return targets without further capital supports than envisaged, remain to be reviewed in the future.
Healthy financial profile: ACL Group’s revenues have increased at a compounded annual growth rate of 8.30% over the last six years (FY2013-FY2019). Moreover, during FY2019 and Q1FY2020, the Company’s revenue has increased YOY by 11.0% and 4.20 % (annualized) respectively, owing to the strong performance of key segments. The moderation in operating profit margins during FY2019 was attributable to the increased global metal prices, and the weaker macro-economic outlook that prevailed in the country. The Company has recorded a PAT of LKR 624 Mn and LKR 175 Mn in FY2019 and Q1FY2020 respectively compared to LKR 762 Mn in FY2018. Notwithstanding the increased short term debt levels in FY2019, the Company’s capital structure still remains moderate with the gearing level of 0.5(x) as of FYE March 2019. 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 FY2019. Although, ACL’s coverage metrics have moderated on account of increased debt levels in FY2019, going forward, ICRA Lanka forecasts healthy profitability margins amidst the declining trend in the global metal prices and healthy order book positon. Therefore, this would also help the Company to partly bring down the currently higher short term debt levels, besides the gradual shift towards the usual working capital funding arrangements.
Price volatility in global metal prices: ACL Cables PLC’s profitability is directly correlated with the global copper/aluminium prices, which have increased sharply during CY2018 (albeit a reduction in prices thereafter to date). 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 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. Therefore, the ability of the management to successfully manage the raw material price cycles and minimize the impact from the adverse price movements, will remain as a key rating sensitivity to the reaffirmed rating.
Macro-economic outlook and government policies; Since the demand for Company’s key product categories are driven by the growth in the local construction industry, the macro-economic conditions such as increasing interest rate, 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 Company. The importation of cables is highly restricted by the SL government, as this is currently in the negative list of imports due to national security concerns. Therefore, this industry currently is protected from the threats of imports. However, 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 therefore, this is a rating sensitivity to the reaffirmed rating.
Moreover, the sharp devaluation of Sri Lankan rupee during FY2019 has not only exerted additional pressure on the Company’s profitability margins during this period, but also compelled the Company to change its working capital financing arrangements, resulting in significantly increased short term debt levels in FY2019. Since, the Company has limited its dependence on short term debts to an extent in Q1FY2020, ICRA Lanka forecasts a meaningful reduction of its short term debt levels in the short to medium term. Therefore, the ability of the Company to reduce its short term debt levels, while successfully managing the forex risks remain as a key rating sensitivity to the reaffirmed rating.
Increasing trade Receivables; the Company’s overall trade debtor level during FY2019, has improved due to several reasons; relatively larger exposures to ECB segment, (wherein the trade receivables under this segment are generally settled within 90 days), the Company’s new distribution channel system, and some market corrections. However, the Company’s trade receivables under the institutional segment during FY2019 has increased noticeably and therefore, the ability of the Company to manage the trade debtors under this segment, while increasing the revenue contribution from this segment, 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: http://www.icralanka.com/corporate-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)
Rating history for last three years: ACL Cables PLC
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