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The Pakistan Credit Rating Agency Limited
Press Release

Date
11-Feb-21

Analyst
Faiqa Qamar
faiqa.qamar@pacra.com
+92-42-35869504
www.pacra.com

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This press release is being transmitted for the sole purpose of dissemination through print/electronic media. The press release may be used in full or in part without changing the meaning or context thereof with due credit to PACRA

PACRA Revises Entity Ratings of Sadiq Oil Extraction (Pvt.) Limited

Rating Type Entity
Current
(11-Feb-21)
Previous
(07-Aug-20)
Action Downgrade Maintain
Long Term BBB- BBB
Short Term A3 A2
Outlook Stable Negative
Rating Watch Yes Yes

The ratings reflect Sadiq Oil’s association with an established and integrated poultry group, Sadiq Group. The Group has significant presence along poultry supply chain and Sadiq Oil supports its vertical integration strategy. Initially, venturing in the branded oil segment (SB Gold) benefitted the Company. However, lately, the Company's topline contracted and stems from refining segment only. As solvent extraction plant is non-operational since Aug-20, the Company is relying on external sources, for semi-refined oil, to manage the operations of its refining segment. On the industry front, demand for edible oil along with sales and recovery of soy meal was impacted during lockdown in the latter half of FY20 due to Covid-19. However, being a staple food item, edible oil demand from household did not drop. Players had sufficient inventories to fulfill demand. Lately, demand from all avenues have picked up. Also, soy meal recovery has improved. However, high dependence of imported raw material, oilseed, exposes players to volatility in international oilseed prices and inherent risk of currency fluctuations. Since Jul-20, Soybean oilseed prices surged by ~51%, accompanied by rupee devaluation. Currently, Sadiq Oil margins are squeeze and are expected to remain low. Until the extraction plant becomes fully operational, sales and recovery of soy meal are expected to remain under pressure. Going forward, players in the refining segment may benefit from increase in refined edible oil and meal prices. However, branded and packaged oil segment is expected to remain competitive. Financial risk profile of Sadiq Oil is characterized by high leveraging, both to fund the increasing working capital needs and expansion activities. Coverages are low and are expected to remain stressed. Working capital cycle remains stretched but drives comfort from Groups integrated presence in poultry sector. The Company has availed debt relief measures of SBP through deferment/restructuring of loans. This is expected to provide relief in terms of debt servicing and ease pressure on cashflow. Further, interest rate cut will lessen debt servicing burden. The Company has been assigned 'Rating Watch' as profitability and cashflows are expected to remain under stress. PACRA will monitor the situation closely and update the ratings accordingly.
The ratings are dependent on the management's ability to manage business risk, while sustaining business margins in prevailing challenges. Moreover, governance framework needs attention. Going forward, generating sustainable operational cashflows is important. Meanwhile, a prudent financial strategy to meet financial obligations remains critical.

About the Entity
Sadiq Oil was incorporated in 2013 and is primarily engaged in oilseed filtering and crushing, oil extraction and refining. Presently, the Company has two solvent extraction plants with a crushing capacity of 600 MT/day. While, the chemical refinery can semi-refine up to 300 MT/day. Physical refinery has a refining capacity of 200 MT/day, while. Ghee plant has a capacity of 250 MT/day. The Company's business line includes three different products (semi-refined edible oil, refined and branded edible oil and meal) in three variants (Soybean, Canola and Sunflower).
Previously, the Company's major shareholding vested with Dr. M. Sadiq (90.6%), followed by his two sons, Mr. Asif Zubair (3.8%) and Mr. Salman Sadiq (5.5%). Post Dr. M. Sadiq's demise, shareholding vests with Mrs. Saadia Sadiq (22%) and her sons: M. Arsal (25%), M. Sanan (27%) and M. Saad (27%).

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.