The credit rating of PJSC “Kirovsky Zavod” (hereinafter, Kirovsky Zavod, the Company, or the Group) has been upgraded due to the positive dynamics of the following indicators: very good FFO before net interest payments and taxes margin (20% in 2023, 21% in 2022); decrease in the ratio of total debt to equity from 3.8x as of the end of 2022 to 1.5x as of the end of 2023; improved liquidity position due to a decline in total debt and the availability of free credit limits. Constraining factors for the Company’s credit rating are a low share of exports and the low score for free cash flow (FCF), as well as highly cyclical and saturated, in ACRA’s opinion, sales market.
Kirovsky Zavod is a conglomerate of machinery production enterprises located in Saint Petersburg. The Group’s main activity is the production of agricultural machinery under the Kirovets brand. The Group is one of Russia’s leading players in this segment. The Group also includes industrial machinery enterprises.
KEY ASSESSMENT FACTORS
The Company’s medium business profile and market position stem from the backlog of less than 1.5x annual revenues and moderate potential for growth in the market capacity. At the same time, ACRA notes increased demand for the Company’s key product, the 150 hp tractor, which ensures full and stable utilization of its manufacturing capacities. In 2023, the Company exited the metals segment, which provided the main portion of export revenues, and this resulted in a decrease in the score for diversification of sales markets.
The score for the Dependence on Sub-contracting and Components sub-factor takes into account the fact that the share of raw materials in the prime cost is 55–60%. The key work is done by the Company’s enterprises. In addition, the Company is currently creating in-house production of axles for tractors and road construction machines, which will allow this share to be reduced. In 2024, Kirovsky Zavod commissioned its own power generating facilities.
The medium assessment of corporate governance takes into account the Company’s long-term strategic goals, improvement of the risk management system, election of a CEO with sound industry experience, as well as a board of directors with a wide presence of independent directors. ACRA expects the Company’s corporate governance to further improve following the approval of a dividend policy and a policy for managing conflicts of interest, and the establishment of key committees for strategy, personnel and remuneration, and investment policy. In late 2023, the Company completed its de-offshorization procedures. Kirovsky Zavod regularly discloses its IFRS financial statements.
The medium financial risk profile assessment is driven by the medium assessment of the size of business (the absolute value of FFO before net interest payments and taxes is less than RUB 30 bln) and the very good FFO before net interest payments and taxes margin of above 15% (vs. 20% in 2023 and 21% in 2022). The ratio of total debt to FFO before net interest payments had not changed since 2022 and remained at 2.0x in 2023. ACRA assumes that the Company’s leverage will grow to 2.7x in 2024 taking into account the need to finance the investment program, and then begin to gradually decline in 2025.
Similar to 2022, FCF was close to zero in 2023, however, ACRA expects it to turn negative by the end of this year due to an increase in capital expenses.
The Company’s liquidity position has improved due to a decline in the volume of total debt and the availability of undrawn credit limits.
KEY ASSUMPTIONS
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The Company meeting its revenue and operating cash flow targets in the forecast period of 2024–2026;
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Total capital investments in line with the business plan in 2024–2025;
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Average FFO margin before net interest payments and taxes at no lower than 15% in the forecast period;
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No major dividend payments in 2024–2026.
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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The Company’s contract backlog exceeding 1.5 of its annual revenues along with decline share of purchased raw materials or a simultaneous increase in the share of export sales;
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Ratio of total debt to FFO before net interest payments declining below 1x along with the ratio of total debt to equity falling below 1x and the ratio of FFO before net interest payments to interest payments exceeding 5x.
A negative rating action may be prompted by:
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FFO before net interest payments and taxes falling below RUB 5 bln and the FFO margin before net interest payments and taxes falling below 15%;
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Ratio of total debt to FFO before net interest payments exceeding 3.5x and the ratio of total debt to equity exceeding 2x;
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Ratio of FFO before net interest payments to interest payments falling below 2.5x;
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Much worse access to external liquidity sources.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Support: none.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings 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 PJSC “Kirovsky Zavod” was published by ACRA for the first time on November 5, 2019. 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 PJSC “Kirovsky Zavod”, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of PJSC “Kirovsky Zavod”. The credit rating is solicited and PJSC “Kirovsky Zavod” 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 PJSC “Kirovsky Zavod”. No conflicts of interest were discovered in the course of credit rating assignment.
