ACRA assigns BBB-(RU) to Incab LLC, outlook Stable

The credit rating of Incab LLC (hereinafter, Incab, or the Company) is based on the Company’s size, which is below average for the Russian corporate sector (the absolute value of FFO before net interest payments and taxes is just over RUB 500 mln), and the medium assessment of corporate governance, in which the Company received a low financial transparency score due to the absence of financial statements compiled according to international standards as of the assessment date. At the same time, ACRA notes the strong geographical diversification of sales markets and very high business profitability.

The financial risk profile assessment is constrained by high leverage and medium debt service coverage. The short-term liquidity indicator is high, largely due to the availability of undrawn credit lines. Without them, the liquidity assessment would be very weak.

Although Incab is a small organization in terms of the Russian corporate sector, it operates one of the largest optical cable production factories in Europe and the largest in Russia and the CIS. The wide range of cables manufactured by the Company allows it to supply consumers from various industries, such as telecommunications, energy, oil production, petrochemicals and oil refining, oil and gas transportation, the defense industry, transport, mining, and metallurgy. According to the Company, its market shares in Russia and the CIS, Europe, and the US are 24%, 1%, and 0.5%, respectively. The Company, including its subsidiaries and affiliates, employs 405 people. Incab is owned by a single beneficiary, its CEO A. V. Smilgevich.

Key rating assessment factors

The Company’s medium business profile assessment takes into account the low share of the contract base in revenue profile (less than 1.5 annual revenues). However, the impact of this factor is neutral due to low cyclicality and the saturated market for the Company’s products. The assessment of dependence on subcontracting and components takes into consideration the fact that the Company’s enterprises perform the core activities, the share of subcontracted work is low, and the Company is able to replace subcontractors and suppliers without incurring major losses. Diversification of sales markets has been assessed as high in view of exports, which contribute more than 20% of the Company’s revenues.

The medium corporate governance assessment reflects the average assessment (in the context of the Russian corporate sector) of sub-factors such as the management strategy and risk management system, for which the Company has established procedures and designated bodies that are responsible for making decisions and their implementation. As Incab’s charter capital is held by its sole shareholder, all key decisions are made and management is performed by him alone, and as of the assessment the Company did not have a board of directors. Consequently, the management structure received a below average assessment. The structure of the group was assessed as average, taking into account the existence of subsidiaries and affiliates and transactions with related parties, although they are economically feasible. The Company received a low financial transparency assessment because it does not publish consolidated financial statements under Russian and international standards with explanations and comments.  However, the Company has launched an international audit together with one of the six largest auditing firms.

The financial risk profile is bb due to the small size of business and high leverage (the weighted FFO before net interest payments to interest payments ratio for 2017–2022 will equal 4.3x compared to 5.5x in 2019), which are the main constraints on the Company’s rating. At the same time, the Company enjoys very high business profitability, with the weighted ratio of FFO before interest payments and taxes to revenues standing at around 15% for 2017–2022. Debt service is average as despite high leverage and the accompanying large interest payments, Incab’s high profitability ensures sufficient cash from operations to service the debt.

Very weak cash flow and high short-term liquidity. The free cash flow (FCF) indicator will be negative in 2020 due to a peak in capital expenditures, which in 2020–2022 will be higher than the previous three-year period. As capital expenditures decline in the coming years and operating cash flow grows, FCF will turn consistently positive, which will enable the Company to reduce its leverage. The Company has high short-term liquidity, however, this is due to unused limits on revolving credit lines provided by banks. The absence of free limits to replenish working capital, in the amount available to the Company, would have had a negative impact on the liquidity assessment due to the lack of internal liquidity sources.

Key assumptions

  • Meeting the revenue and operating cash flow targets for 2020–2022;
  • Total capital investments in 2020–2022 in line with the business plan;
  • Medium FFO margin before interest payments and taxes (no lower than 14%) within the forecast horizon;
  • No major annual dividend payments within the forecast horizon.

Potential rating or outlook 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:

  • Total debt to FFO before net interest payments ratio falling below 3.5x amid simultaneous growth of the FFO before net interest payments to interest payments ratio above 5.0x;
  • FCF margin exceeding 2%.

A negative rating action may be prompted by:

  • Short-term liquidity ratio falling below 1.0x;
  • Total debt to FFO before net interest payments exceeding 5.0x;
  • Coverage deteriorating to lower than 2.5x.

Rating components

SCA: bbb-.

Adjustments: 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 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.

A credit rating has been assigned to Incab LLC for the first time. 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 the data provided by Incab LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the RAS statements of Incab LLC. The credit rating is solicited, and Incab LLC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Incab LLC in its financial statements have been discovered.

ACRA provided no additional services to Incab LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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