Karachi, September 09, 2022 (PPI-OT):VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘BBB/A-2’ (Triple B/A-Two) to Servo Motor Oil (Private) Limited (SMOPL). The medium to long-term rating of ‘BBB’ reflects adequate credit quality; protection factors are reasonable and sufficient. Short-term rating of ‘A-2’ indicates good certainty of timely payment, liquidity factors and company fundamentals are sound and access to capital markets is good. Outlook on the assigned ratings is ‘Stable’.

SMOPL was incorporated in Pakistan on June 05, 2008 as a private limited company. The Company is principally involved in manufacturing and sales of Blended Lubrication Oil and Greases. The Company operates 48 warehouses within Pakistan and is part of Chicago Group (CG) of Companies, which is based in Multan. CG has a diversified group portfolio across various sectors including Tracking Solution (TRAXX VTMS (Pvt) Limited), Food (Riverside Raw Material (Pvt) Limited and Sidra Foods (Pvt) Limited) and Spare parts (Chicago Metal Works (Pvt) Limited and Oil and Filter Company).

Assigned ratings incorporate SMOPL’s sales mix and long-term association with clients. The Company’s revenue base is diversified across lubricant and grease products, with the most dominant segment being Motorcycle oil. The business mix does feature client concentration; however, the risk is addressed as 3 of these 4 clients are directly or indirectly associated with SMOPL. As per management, these clients are distributors for SMOPL products.

SMOPL’s net margin does depict sensitivity to changes in cost of doing business and benchmark rates, given that the Company relies on running finance lines to fund its working capital requirements. Going forward, the net margins may come under pressure, given significant hike in petroleum prices. However, the inflationary pressure will also translate in uptick in product pricing and hence the revenue on each product. Accordingly, there might be a short-term pressure on profitability margins, which is likely to normalize over medium term.

As of Mar’22, debt on the Company’s balance sheet is largely short-term. Comfort is derived from adequate coverage of short-term debt with inventory and trade debts. Equity base of the Company has grown at a CAGR of 27.4% (Jun’18 – Mar’22). The shareholders of the Company injected Rs. 31m as capital to fund working capital requirement. The Company maintained 100% profit retention for the past 4 years. Given the internal capital generation capacity, full profit retention and equity infusion, gearing has remained below 1x. During the rating horizon, the Company’s FFO to Debt is expected to remain in the range of 30-32%. DSCR is projected to remain at comfortable level as financing is limited to running finance lines, while there are no plans of raising additional long-term debt.

For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/