Nepal Warehousing Company's Credit Rating Plummets to [ICRANP] LD: Unveiling the Intriguing Reasons Behind Downgrade

Nepal Warehousing Company Limited (NWCL) has recently experienced a downgrade in its long-term and short-term loan ratings by ICRA Nepal. The long-term loan rating has been revised from [ICRANP] LBB- to [ICRANP] LD, while the short-term loan rating has been downgraded from [ICRANP] A4 to [ICRANP] D.

This rating adjustment is primarily a result of NWCL's failure to meet its debt obligations promptly, with delays exceeding 30 days for payments due in mid-October 2023 and mid-January 2024. The company attributes these delays to insufficient revenue generation from its operational unit and setbacks in commissioning remaining units. The Default Recognition Policy of ICRA Nepal has triggered this downgrade, emphasizing the importance of NWCL establishing a consistent record of timely debt servicing for future rating sensitivity.

The rating action also takes into consideration the financial performance for H1FY2024, which fell below ICRA Nepal's earlier projections. Unexpected delays in the completion of proposed warehousing facilities, coupled with the initiation of debt repayment from mid-January 2022, have resulted in nominal revenues and a high debt burden, leading to subdued debt servicing indicators (DSCR of -0.3 times for H1FY2024). The company's liquidity profile is concerning, indicated by a significant rise in working capital intensity amid limited scalability in revenues. NWCL is expected to face offtake and stabilization risks in the initial years.

The company recently issued 11,41,250 IPO shares at Rs. 100 per share, bringing to a total of 68,75,000 shares listed in NEPSE. During the IPO issuance, ICRA Rating reaffirmed the issuer rating of [ICRANP-IR] BB-, signifying a moderate risk of default in servicing financial obligations.

In its unaudited financial report for the second quarter of Fiscal Year 2080/81, NWCL disclosed a substantial increase in net loss amounting to Rs. 9.21 Crores. NWCL maintains a paid-up capital of Rs. 68.75 Crores; however, negative other equity stands at Rs. 15.27 Crores.  The company has reported negative Earnings Per Share (EPS) standing at Rs. 13.40 while the net worth of the company is reported at Rs. 77.78. The last trading price of the company stands at Rs. 765.

NWCL possesses experienced promoters as a credit strength; however, it faces significant challenges with its project predominantly in the execution stages, leading to delays in debt servicing, stabilization risks in the initial years, and potential losses due to lower-quality grains. These challenges, reflected in recent ICRA rating downgrades, highlight the pressing need for NWCL to address operational issues, implement effective risk mitigation strategies, and enhance project execution to regain investor confidence and ensure long-term financial sustainability.

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