Karachi, VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Servo Motor Oil (Private) Limited (SMOPL) at ‘BBB/A-2’, indicating adequate credit quality and good certainty of timely payment with a stable outlook. This rating reflects SMOPL’s sound financial fundamentals and its diversified portfolio across various sectors.
According to VIS Credit Rating Company Limited, the reaffirmed ratings encompass both the medium to long-term and short-term perspectives of the company. SMOPL, established in 2008 and part of the Chicago Group (CG) of Companies, is engaged in the manufacturing and sales of lubrication oil and greases. The company operates 50 warehouses in Pakistan and is part of a diverse group with interests in sectors including tracking solutions, food, and spare parts.
The ratings are influenced by the high to medium business risk profile of the lubricant industry, characterized by cyclicality, competitive pressures, and limited pricing power. Despite these challenges, the ratings also factor in the continuous sponsor support extended to SMOPL, which is expected to persist. The recent period has been challenging for the company due to higher base oil and additive prices, currency depreciation, and import restrictions, leading to a decline in SMOPL’s topline.
However, the company managed to improve its gross margins in FY23, despite ongoing pressure on net margins caused by rising energy costs and increased interest rates. SMOPL’s liquidity profile remains healthy, bolstered by a solid current ratio and short-term debt coverage. The improvement in the collection period has positively impacted the working capital cycle. The company’s capitalization profile has shown improvement, characterized by reduced gearing and leverage, thanks to profit retention and sponsor injections.
VIS emphasizes the importance of further improvement in net margins and maintenance of the capitalization profile for sustaining the ratings. The stability and growth of SMOPL in the challenging lubricant industry landscape are critical for maintaining its creditworthiness.