The credit rating of Electroapparat LLC (hereinafter, the Company) reflects, on the one hand, the Company's very weak market position, low level of corporate governance, very weak cash flow, and small business size, and, on the other hand, high profitability, low leverage, and medium assessments of business profile, geographic diversification, and liquidity. The rating is constrained by a very low assessment of the Company's industry risk profile stemming from the high volatility and cyclical nature of the wholesale trade sector, as well as low entry barriers, which implies high competition.
The Company was founded in 2015. Today, it is the official distributor of GC Electroshield — TM Samara JSC and focuses on the wholesale of electrical equipment. The main sales fall on power transformers, vacuum circuit breakers, and load break switches. The Company is a micro-enterprise that employs 20 people. The owner (100% of the authorized capital) and the ultimate beneficiary of the Company is its director V.G. Belova.
Key assessment factors
Market position assessment. The Company is a player in the highly competitive electrical equipment market with a large number of participants and supplies industrial products. The Agency notes the weakness of the Company's competitive position, which is due to the concentration on a single manufacturer and sales channel (tenders).
The medium assessment of business profile takes into account a low cyclicality of the Company's main business line (wholesale of power transformers), which generates most of its revenues. A steady demand for these products follows the permanently growing power consumption and includes the need for both newly commissioned facilities and replacement of outdated equipment. The Company sells electric equipment manufactured by GC Electroshield — TM Samara JSC, as well as circuit breakers of its own brand made in China. Equipment is sold to large customers from various industries following the successful tender bids. ACRA notes that the Company's revenue is concentrated on some of the largest customers that generate about 80% of its revenue, including Baker Hughes JSC, Novomet-Perm JSC, Leader Electro Trade PE, ATOM GC. The Company had no overdue receivables at the end of 2020. The Company's terms of sale provide for a deferred payment of 30 to 90 days, while the Company purchases equipment on the terms of a 60-days deferred payment or advance payment. At the same time, to maintain warehouse stocks of finished products, the Company has to finance its working capital.
Medium assessment of geographic diversification. The Company has no obvious advantages in terms of geography of its presence. Its main market is the Russian Federation. Export sales of electrical equipment in 2020 amounted to RUB 74.7 mln (14.6%). The main export destinations are Kazakhstan and Uzbekistan.
Low assessment of corporate governance. The Company's strategy is not formalized. In the medium term, it is planned to purchase rolling stock, as well as to release an in-house product, low-voltage switchgear, by 2023. The risk management system is poorly developed. The documents regulating the risk management strategy, including the policies for managing interest rate, currency and other market risks, is not approved yet. At the same time, the Company plans to use hedging instruments and minimize exposure to financial risks in making settlements in foreign currency. All day-to-day and key strategic decisions are made by the Company's director, which indicates the key person risk and lowers the management structure score. The group structure is represented by a single legal entity. At the same time, in 2019 and 2020, there was a practice of granting short-term loans by the Company's owner, as well as providing transport services by a related party. The Company prepares its RAS financial statements but not IFRS financial statements.
The financial risk profile score is determined to the Company's small size and very weak cash flow. At the same time, the profitability ratio is high and the leverage is low. Medium scores for coverage and liquidity have a neutral impact on the rating.
In 2020, the Company's revenue increased by 69% y-o-y to RUB 512 mln, and FFO before net interest and tax increased to RUB 62.2 mln. In the forecast period, ACRA expects the revenue growth to continue, which is largely due to a rise in prices for the main components of the Company's products. The return on FFO before interest and tax was 12.2% in 2020 versus 9.1% a year earlier. ACRA forecasts the 2021–2023 average return at 9%.
The ratio of long-term debt to FFO before fixed charges was 0.6x in 2020. The Agency expects this ratio to rise to 2.1x in 2021, in view of the Company's plans to issue bonds and borrow short-term loans in 2021 to finance its current operations. The debt portfolio of the Company includes five-year ruble-denominated commercial bonds featuring a fairly high coupon rate and due in 2025, as well as short-term ruble-denominated loans from commercial banks. The debt service and repayment schedule is comfortable, without any pronounced peak periods in the medium term. At the same time, there is a concentration on the main lender, SME Bank JSC (rated by ACRA at BBB(RU), status “Rating under revision: developing”). The ratio of FFO before net interest to interest was 6.9x in 2020. ACRA expects this ratio to decrease to 3.2x in 2021 due to growing interest expenses.
The liquidity assessment is medium due to the structure of the Company's debt featuring a high share of short-term loans, no peak repayments in the short-term period, and the availability of committed credit lines (RUB 15 mln) and liquid securities. Currently, the Company is trying to further increase the amount of committed credit lines, including those needed to ensure export deliveries. The cash flow score is determined by negative FCF margins in 2019 (-5%) and 2020 (-0.2%). In 2021 and 2022, ACRA expects the margins to remain negative on the back of investments into organizing the production of its in-house product and an increase in working capital. In the future, the Agency predicts a positive FCF and an increase in the FCF margin to 1.8% by 2023. At the same time, ACRA notes that the Company has a certain flexibility in its investment program and dividend payments, depending on the prevailing market conditions.
Annual average growth of revenue at least 18% in 2021–2023;
Capital expenditures in 2021–2023 in line with the plans of the Company;
Dividend payments of no more than 50% of net profits.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
FCF margin growing above 2%;
FFO before net interest to interest growing above 8.0x.
A negative rating action may be prompted by:
The return on FFO to interest and tax falling below 5%;
FFO before net interest to interest declining below 1.0x.
Standalone creditworthiness assessment (SCA): b+.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating has been assigned to Electroapparat LLC for the first time. The credit rating of Electroapparat LLC and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by Electroapparat LLC, information from publicly available sources and ACRA’s own databases. The credit rating is solicited, and Electroapparat LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Electroapparat LLC. No conflicts of interest were identified in the course of credit rating assignment.