The credit rating of Elektroresheniya LLC (hereinafter, the Company, or EKF) is based on its medium assessments of business profile, corporate governance and geographic diversification, low market position assessment, high profitability, medium leverage, high coverage, and medium liquidity. 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. The product range includes over 16,000 items in 36 product lines, including low-voltage electrical products, medium-voltage equipment, cable support systems, bus ducts, smart home systems, lightning protection systems, professional lighting equipment, etc. The production base of the Company includes enterprises in Moscow, Moscow and Vladimir Regions, as well as five logistics centers. The Company's staff exceeds 900 employees.
Key assessment factors
The low assessment of market position reflects EKF's role as a competitive player in the fragmented market of electrical equipment, with a share of about 7%, according to the Company's estimates. Having its in-house standard solutions for various industries, as well as a product range covering high, medium and low price segments of the market, EKF successfully competes with industry leaders in the key segments of presence.
The medium assessment of business profile takes into account the absence of significant contracted volumes and a stable growth in the Company's revenue over the observed period, which is due to the stable demand for electrical equipment from the main consumer industries: civil and individual housing construction, processing industries, energy sector, and housing and communal services. Products are manufactured in EKF's own factories, as well as by foreign contractors. At the same time, the Agency takes into account that the Company has its own design bureau, engineering center, laboratory for the development of new products, and the ongoing work to increase the share of its own high-tech products and to achieve deeper localization.
The medium assessment of geographical diversification is due to the low share of exports in the Company's revenues (less than 20%). Products are delivered to more than 15 countries. The national market is diversified, and sales are carried out through the largest distributors in all federal districts.
The medium corporate governance assessment reflects the medium scores, in the context of the Russian corporate sector, for the sub-factors Management Strategy, Risk Management System, and Governance Structure. The Company has approved its strategic goals until 2025, which include an active growth of operating performance, measures to expand the product range, investments in its own product development, expanding the geography of presence, and preparations for an IPO. The financial plans are based on the strategic goals and made in line with the approved regulations. Historically, EKF does not pay dividends, reinvesting profits in the business to increase its capitalization. The Company has approved a risk management standard for the quality management system, and it also conducts regular risk assessments and implements risk mitigation measures. Cargoes are insured by transport companies involved in the delivery of products. The governing bodies of EKF include the general director and the general meeting of members. The principles and procedures of corporate governance are set forth in the Charter and internal documents that establish the structure and powers of the management and control bodies. The group structure includes a production company and two trading houses, one of which is located in Kazakhstan. There are no major related-party transactions. The financial statements prepared by the Company for 2020 are its first consolidated IFRS financial statements.
The financial risk profile assessment is based on the high profitability, medium leverage, high coverage, medium liquidity, weak cash flow, and a less-than-medium size of the Company.
The FFO before net interest and taxes amounted to RUB 776 mln in 2020 (against RUB 438 mln in 2019), and the weighted FFO before net interest and taxes was RUB 913 mln. The return on FFO before interest and taxes was 14% in 2020 (against 7% and 11% in 2018 and 2019, respectively). In the forecast period of 2021–2023, the Agency expects the return to remain at the level of 13%.
In 2020, the ratio of total debt to FFO before net interest decreased slightly compared to 2019 and amounted to 2.3x versus 2.6x. In 2021, the Agency expects the ratio to increase to 2.8x and to gradually decrease to 2.4x by 2023. The Company's debt portfolio includes short-term ruble-denominated floating interest credit lines granted by leading Russian banks, with the largest share of Sberbank of Russia PSC (ACRA's rating: AAA (RU), outlook Stable). To finance its investment program, EKF borrows long-term loans from state development institutions, including MONOTOWNS.RF, Industry Development Fund of the Vladimir Region, at preferential rates. There are no material off-balance sheet guarantees. The debt service ratio (the ratio of FFO to net interest to interest) is projected at 6.2x in 2021, with a slight decline to 6.0x by 2023.
The medium liquidity assessment is determined by the absence of peak debt repayment periods in the short and medium term. At the same time, external sources of funding prevail, including undrawn credit lines, and the planned bond issue. The weak cash flow is due to negative FCF margins in both the observed period (-5% in 2020) and the forecast period. In 2021, ACRA expects the margin to equal -6.3% and gradually increase to -3.9% by 2023. These values are driven by the growth of working capital and the implementation of planned capital investments.
The average annual revenue growth of at least 30% in 2021–2023;
Implementation of the investment program as planned;
No dividend payouts.
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:
The ratio of total debt to FFO before net interest declining below 2.0x, while the ratio of FFO before net interest to interest exceeding 8.0x;
The return on FFO before interest and taxes growing above 15% and the FCF margin increasing to positive values.
A negative rating action may be prompted by:
The ratio of total debt to FFO before net interest increasing above 3.5x, while the ratio of FFO before net interest to interest declining below 5.0x;
The return on FFO before interest and taxes declining below 10%, with a simultaneous decrease of the short-term liquidity ratio.
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 Elektroresheniya LLC for the first time. The credit rating of Elektroresheniya 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 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 was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Elektroresheniya LLC. No conflicts of interest were identified in the course of credit rating assignment.