ICRA Lanka upgrades the issuer rating of ACL Cables PLC
|Issuer Rating||NA||NA||Upgraded to [SL] AA- (Stable) from [SL] A+ (Stable)|
ICRA Lanka Limited has upgraded the Issuer rating of ACL Cables PLC (“ACL”/ “the Company”) to [SL]AA- (pronounced S L Double A minus) from [SL]A+; the Outlook remains Stable.
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 upgrade of the rating factors in the Group’s strong financial position and its dominant market share of the local cable industry with strong brand equity. ACL has also been able to secure a leading market share due to strong execution track record, quality standards along with relatively high value-additions. ACL’s strong market position and the strategic management of supply chain has enabled the Company to withstand the challenging limitations that have driven away most of the small-scale competitors out of the market.
The rating upgrade factors the strong performance of the group over the last 18 months, despite the challenging business environment that prevailed. The rating also factors the improvement in the capitalization profile and the coverage indicators of the group, driven by strong operating profits and healthy accruals. Further, the dominant market position enjoyed by ACL is expected to sustain into the foreseeable future given the low level of competition in the industry and the high level of barriers to entry with the import restrictions imposed by the GoSL.
The rating takes into consideration, ACL’s exposure to the volatility of raw material prices and the exchange rate movements which make the Company’s margins vulnerable. However, ICRA Lanka notes that with the near-monopoly market position and the essential nature of the products, ACL has been able to maintain steady gross margin levels despite the volatile input prices, as the company is able to pass-down the cost increases to the customer, to a greater extent. However, the Company’s ability to secure/import raw materials given the challenging external economy of the country will be a key monitorable, going forward.
The short-term nature of the debt profile shows a strong correlation to the working capital intensity of the Company, whereas the long-term loans are expected to remain minimal in the medium term, given the low level of capex planned for the Company. The strong liquidity profile provides comfort for the company in comparison to the modest debt servicing obligations of the company, over the short-medium term.
The Stable outlook reflects ICRA Lanka’s expectations that ACL will continue to benefit from its healthy order backlog and retain its strong market position.
Dominant market position resulting in better pricing power and scale economies: Dominant market leader in cable manufacturing industry with over 70% market share. ACL is also the market leader in Maldives and Mauritius and the supplier to many countries in the region. ACL’s growing regional presence has paved the way for the sustainable growth and expansion of its overall business activities. Being the most recognized brand in the local cable industry, ACL has established a strong presence within the region. Dominant market position has enabled the group to maintain its healthy margins, despite the increase in input prices, as ACL is able to pass-down the cost increases to the customer.
Healthy profitability characterized by stable GP margins and good operating margins: The active and strategic management of supply chain, frequent price revisions coupled with economies of scale enjoyed has enabled ACL to sustain relatively high margins, despite the input price volatility. The group was able sustain its GP margins at about 19% in FY21 (19% in FY20), and operating margins at around 9% (9% in FY20), despite the sharp increase in global commodity prices (Copper and Aluminium) during the period. In addition, as a backward integration strategy, ACL runs a recycling plant to re-use scrap metals and this has helped to reduce the raw material costs. ICRA Lanka notes that the group has been able to further improve its operating margins in H1FY22 to about 13% due to better capacity utilization and economies of scale. During FY21, the group reported a PAT of LKR 1.6 Bn compared to the PAT of LKR 1 Bn in FY20; and for the 6M ended Sep-21, the group has recorded a PAT of LKR 1.4 Bn.
Relatively inelastic demand and strong revenue visibility: There is relatively high demand from the Utilities segments amidst the proposed mega infrastructure development projects. This, together with the accelerated recovery of the local construction industry has ensured continued flow of demand in the cable industry. Also, ICRA Lanka notes that the relatively price inelastic nature of the product has enabled the company to increase the prices (due to higher input prices) without affecting the overall demand. Notwithstanding the challenging macro environment that prevailed, the group recorded a revenue growth of 21% in FY21, while the revenue growth for H1FY22 was about 40%.ICRA Lanka expects this robust revenue growth to sustain in the short to medium term based on the healthy order backlog of the company.
Healthy capitalization profile with improved coverage indicators: The Company has low debt levels relative to the net worth resulting in low gearing; Debt/ TNW stood at about 0.56 times as Sep21, vis-à-vis 0.31 times in Mar-21 and 0.59 times as in Mar-20. ICRA Lanka notes that, the group debt (about LKR 7.4Bn as in Sep21) mostly consists of short-term debt taken for working capital financing, while the long-term debt exposure remains modest. And the short-term debt balance tends to move in-line with the working capital requirements of the group. In addition, healthy operating profits have resulted in good coverage indicators for the group; interest cover improved to 4.05 times in FY21, vis-à-vis 2.72 times in FY20; the same has further improved to 5.71 in H1FY22. Leverage indicators have also improved during the period from 3.21 in FY20 to 1.67 in FY2021 and 1.70 in H1FY22. ICRA Lanka expects these capitalization indicators to sustain over the short to medium term, despite the volatility in short term borrowings.
Price volatility in global metal prices: ACL Cables PLC’s cost structure is directly correlated with the global copper/aluminum prices, which have increased sharply post COVID-19 Pandemic. However, ICRA Lanka notes that, generally, the Company would pass-through the raw material cost increases onto end customers especially in the retail/institutional segments, through its monthly price revisions. In addition, the company enters into price-locking agreements for confirmed long term orders from CEB (when the raw material prices are increasing). However, 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.
High working capital intensity: Amidst the current challenging business environment and the volatility in raw material prices, ACL has resorted to increase their inventory levels in order to ensure business continuity. The delays in payments from CEB, which is one of the largest customers of the company, has driven the debtor days up during 6MFY22. This has been offset to a certain extent by the increase in creditor days as a part of the regulations imposed by the GoSL in light of the foreign exchange issues prevailing in the country. The working capital requirements directly impacts and is largely responsible for the short-term debt levels of the company.
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 75% 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
|Figs are in LKR Mn||FY18||FY19||FY20||FY21||H1FY22|
|OPBDITA/Interest & Finance Charges||3.40||2.58||2.72||4.05||5.71|
|NCA/Total Debt (%)||23%||10%||16%||38%||42%|
|Total Debt/OPBDITA (times)||2.02||4.00||3.21||1.67||1.70|
Note; Gearing- (Total debt/ Networth)
Rating history for last three years: ACL Cables PLC
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