“Expert RA” Rating Agency confirmed the creditworthiness rating of a non-financial company JSC "Power machines" at ruAA- level
JSC "Power machines" (hereinafter – the "Group", the "Company") is a power engineering group of companies that designs, manufactures and supplies equipment for thermal, nuclear and hydroelectric power plants. The company is Russia's largest manufacturer of steam and hydraulic turbines, turbine generators and hydrogenerators. At the moment, the company together with the Ministry of Industry and Trade of the Russian Federation is implementing a project on production of high capacity gas turbine units, by the end of 2023 JSC "Power machines" plans to manufacture the 1st serial copy of GTE-170 high capacity turbine. The Group carries out complex projects in the CIS and a number of non-CIS countries.
The Agency estimates the risk profile of the group's industry at the above-average level. The volume of overdue indebtedness of counterparties in this industry is at the average level for the economy. The resilience to external shocks of manufacturers of power engineering equipment is evaluated at an average level. The stability arises from the consistent demand for their products, which is attributed to the extended production cycle and a substantial portion of orders coming from major state-owned companies. The agency assesses barriers to entry as high for the company, given its presence in a knowledge-intensive and capital-intensive industry. The emergence of new competitors is considerably restricted in the medium term due to the substantial time and financial investments in R&D and fixed assets.
The company's market and competitive positions are assessed as high. The Group has a significant contract base, with average contract duration exceeding the agency's benchmarks. JSC "Power machines" is the leader in the power equipment manufacturing market in Russia. Product diversification is rated at the above-average level – the maximum share in revenue is accounted for by products for NPP. Group sales are diversified – the share of the largest customer does not exceed 30%. Dependence on hard-to-replace suppliers and contractors is insignificant. Production assets are localized in Saint Petersburg and in the Leningrad Region and are covered by insurance.
The nature of JSC "Power machines" business implies a significant share of advances from customers, besides, the company actively uses government subsidies, which allows it to keep its debt load at a low level. However, the ratio of debt (including leases and sureties issued) as of December 31, 2022 (hereinafter referred to as the "reporting date") to EBITDA for 2022 (hereinafter referred to as the "reporting period") increased slightly YoY, but is near the lower end of the agency's benchmarks and continues to support the company's rating. The decline in the debt burden indicator was attributed to a decrease in EBITDA during the reporting period. This was a result of the temporary suspension of a new contracting in 2022, influenced by volatile currency exchange rates. The Agency anticipates that the debt burden indicator will decrease to a level below benchmarks by the end of 2023. This is expected due to significant planned EBITDA growth during this period and the absence of significant debt borrowings in the company's plans. The favorable level of supporting capital expenditures needed by the group contributes to the high valuation of Debt / (FFO – capex maint). The overall EBITDA coverage of interest expenses (including bank guarantee expenses) stands at 3.0x at the end of the reporting period, compared to 4.5x a year earlier. The agency anticipates that this metric will increase to surpass the agency's benchmarks in 2023. The company's involvement in government programs of preferential lending provides additional support for evaluating the interest burden factor. The group's profitability experienced a slight decline in the reporting period. However, EBITDA and FCF margins are anticipated to improve in the near term, driven by a recovery in contracting levels, revenue recognition from existing projects, and the group's transition to an inflation-indexed pricing mechanism.
The Agency assesses the group's liquidity at a high level. The operating cash flow within one year from the reporting date, considering the cash balance, adequately covers the planned payments for debt repayment and servicing, as well as capital expenditures. The qualitative assessment of liquidity is constrained by the company's absence of a formally adopted dividend policy. The group exhibits a minor exposure to market risks arising from certain currency imbalances in revenue and costs. However, this exposure is partially offset by natural hedging mechanisms.
In the block of corporate risks the Agency positively assesses the transparent and stable ownership structure. The Agency highlights certain shortcomings, including the absence of independent directors on the board of directors and the lack of a collegial executive body. Transparency also exerts a restraining influence on the rating, as the company does not disclose its financial statements or operational performance in the public domain. The quality of strategic support and risk management is evaluated at a high level. However, a notable shortcoming is the absence of a collegial body responsible for risk management.