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The Pakistan Credit Rating Agency Limited

Date
18-Nov-2016
Analysts
Amara Gondal
amara.gondal@pacra.com

Shoaib Afzal
shoaib.afzal@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Rating Modifiers | Outlook and Rating Watch (Jun 16) [View]
  • Correlation between Long-term and Short-term rating (Jun 16) [View]

Related Research

  • Sector Study | Fertilizer (Oct 16) [View]
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PACRA Maintains Ratings of Engro Fertilizers Limited
 Rating Type Entity Debt Instrument ST Sukuk
Current
(18-Nov-2016)
Previous
(18-Nov-2016)
Current
(18-Nov-2016)
Previous
(18-Nov-2016)
Current
(18-Nov-2016)
Previous
(02-Jun-2016)
 Action Maintain Maintain  Maintain  Initial
 Long Term AA- AA-  AA-  AA-
 Short Term - A1+
 Outlook Stable Stable  Stable  Stable
 Rating Watch - - - - - -

The ratings take into account sustained operations of the company; capacity utilization at both plants remained high on the back of continued gas supply from Mari and other. The risk of gas curtailment has diminished with strengthening of local reservoirs and continued import of RLNG. Better availability of gas has improved overall availability of urea in the market. This, along with declining international prices, has kept local prices under check. Lately, higher inventory levels forced competitive price reduction, in turn reduction in margins. Industry’s ability to manage high business risk is dependent on price induced local demand increase – that should help off load high inventories and create absorption of improved production levels – amidst low international urea price. Wherein, any further reduction may force price cut. EFert business fundaments remain largely in line with industry dynamics. It has experienced squeeze in margins and, in turn, cashflows. The financial risk profile of the company is characterized by moderate leveraging, which has currently spurred due to high working capital requirements. EFert continues to derive strength from its association with Engro Corporation – a corporate conglomerate.

The ratings are dependent on sustained risk profile of the company. Any constraint to perceived ability to keep business and financial risk in respective matrix, may impact the ratings.
About the Entity
About EFert is 56.45% owned by Engro Corporation Limited (ECorp), a corporate conglomerate with a consolidated asset base of PKR 251bln and revenue base of PKR 107bln at end-Sep16. ECorp is majority (46%) owned by Dawood Group (DG), through corporate and individuals. EFert's urea plants (base - 975k MT, Enven - 1,300k MT) and NPK plant are located at Daharki and Port Qasim, respectively.

EFert's board comprises three Engro executives, one DG representatives, and four independent directors. Mr. Khalid Siraj Subhani, the CEO of the parent company, is the Chairman of board. Mr. Ruhail Muhammad, the CEO of EFert, is a seasoned professional enjoying a long association with Engro group.

About the Instrument
The company issued the Sukuk of PKR 3,200mln in Jul-14, the issue is for a tenor of 5 years maturing Jul-19. The instrument has over-the-counter (OTC) listing. The profit is payable semi-annually at 6 month Kibor plus 175bps. Redemption of the Sukuk is scheduled in ten stepped-up semi-annual instalments, starting from Jan15. The instrument is secured by a ranking charge over the fixed assets with a 25% margin. Around 10% of the issue amount (PKR 320mln) has been repaid by end-Sep16 with the remaining (PKR 2,880mln) to be repaid in 6 semi-annual instalments.

EFert issued a syndicate privately placed Sukuk of PKR 5,000mln for a tenor of 6 months. The issue shall have a single bullet payment (principal + profit) @ 6-month KIBOR plus 0.4%, falling due in November 2016. The company will redeem the said issue in a timely manner from internal cashflows.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.
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