The credit rating of Elektroresheniya LLC (hereinafter, the Company, or EKF) has been upgraded due to the growth of operational and financial indicators in 2022, which improved the assessments of leverage and liquidity.
The rating is based on the Company’s very high profitability, low leverage coupled with high coverage, strong liquidity, medium assessments of the business profile, corporate governance and geographic diversification, and a low market position assessment. The rating is constrained by the weak cash flow and a smaller-than-medium size of the Company.
EKF is engaged in the design, production and sale of electrical equipment and solutions. Its product range includes over 17,000 items in 36 product lines, including smart home systems, professional lighting equipment, electricity meters, low-voltage electrical products and medium-voltage equipment, heating systems, etc. EKF’s manufacturing assets include factories in the Vladimir Region, a state-of-the-art test laboratory, a design bureau, and seven logistics centers in Russia, Kazakhstan, Uzbekistan, and China. The Company has 1,500 employees. The Company was included in the list of systemically important enterprises of the Ministry of Industry and Trade of Russia in 2022.
KEY ASSESSMENT FACTORS
Medium operational risk profile assessment. The Company is a competitive player in the market of electrical equipment, steady demand for which is driven by various sectors of the Russian economy (manufacturing, energy, construction). The Company’s presence in the main price segments of the market and a wide range of products allows it to increase sales annually regardless of the absence of significant contracted volumes. EKF continues to develop its own manufacturing assets, expanding the share of localized products. Its export destinations are diversified as products are delivered to both CIS and non-CIS countries, but the share of exports in revenues is low (up to 20%).
Very high profitability and below-medium size. The Company continues to demonstrate stably high growth of revenues, which amounted to RUB 12,214 mln in 2022 vs. RUB 7,763 mln in 2021 (57.3% growth). FFO before net interest payments and taxes amounted to RUB 2,306 mln in 2022 vs. RUB 1,204 mln in 2021. The FFO before interest payments and taxes margin was 18.9% in 2022. Positive results were due to lower cost price as a result of the changing yuan exchange rate, as well as growth of the prices of EKF products for clients and end users. ACRA assumes that EKF’s profitability will remain at a very high level in 2023 (above 18%), while revenues will continue to grow. FFO before net interest payments and taxes weighted from 2020 to 2025 was used to assess the size of the Company; this indicator amounts to RUB 2,556 mln, which corresponds to a below-medium size according to ACRA’s methodology.
Low leverage and high coverage. As of the end of 2022, the ratio of total debt to FFO before net interest payments had declined to 1.8x compared to 3.5x a year earlier, while the weighted average value of this indicator for 2020 to 2025 declined to 1.6x, which led to an improved assessment of this factor. Continued growth of FFO before net interest payments against the backdrop of maintaining the current level of borrowings or its reduction will allow the Agency to consider the possibility of further improving the assessment of EKF’s leverage in the medium term. The loan portfolio is sufficiently diversified by maturity and lender. Part of the funds are preferential long-term loans obtained from state development institutions to finance the Company’s investment program. The Company uses credit lines from several large Russian banks to fund its current operations. The Company plans to enter the public debt market in 2023 by making its debut bond issue, which will allow part of the short-term debt to be replaced and improve the structure of the loan portfolio in terms of maturity. The entire corporate debt is denominated in rubles, and bank loans have floating and fixed rates. The ratio of FFO before net interest payments to interest payments was 4.9x in 2022.
Strong liquidity assessment. The Company has diversified sources of internal and external financing — cash balances held in accounts and committed credit lines. EKF uses non-debt instruments (factoring, letters of credit with post-financing) to finance its current operations, which reduce the need for working capital financing. The Company plans to issue bonds in 2023. The Company’s repayment schedule for investment loans is balanced (there are no peak repayments), and the main annual repayment volumes are formed by short-term credit lines used to finance current activities.
The FCF margin is negative due to two factors: on the one hand, financing of the investment program, the expenditures on which amounted to around RUB 400 mln in 2022 (planned capital investments for 2023–2025 amount to RUB 5 bln), while on the other hand, due to the need to finance working capital as a result of the expansion of operations. The FCF margin was around zero in 2022, and ACRA expects this indicator to remain stable in 2023. The Agency assumes that the FCF margin will turn negative in 2024–2025 due to higher capital expenditures and planned dividend payments.
KEY ASSUMPTIONS
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Average annual revenue growth of at least 25% in 2023–2024;
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Implementation of the investment program as planned;
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Dividend payments no earlier than 2025.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Sustainable growth of sales and revenues;
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Ratio of total debt to FFO before net interest payments declining below 1.0x, total debt to capital ratio falling below 0.5x, and the FCF margin turning positive;
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Ratio of FFO before net interest payments to interest payments exceeding 8.0x and the FCF margin turning positive.
A negative rating action may be prompted by:
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Ratio of FFO before net interest payments to interest payments declining below 5.0x;
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Ratio of total debt to FFO before net interest payments exceeding 3.5x;
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FFO margin before interest payments and taxes declining below 15%.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned to Elektroresheniya LLC 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 of Elektroresheniya LLC was published by ACRA for the first time on October 20, 2021. The credit rating 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 data provided by Elektroresheniya LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Elektroresheniya LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Elektroresheniya LLC. No conflicts of interest were discovered in the course of credit rating assignment.
