The Pakistan Credit Rating Agency Limited
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PACRA Maintains Entity Ratings of Sadiq Feeds (Pvt.) Limited, Assigns 'Rating Watch', Outlook 'Negative'

Rating Type Entity
Action Maintain Maintain
Long Term BBB+ BBB+
Short Term A2 A2
Outlook Negative Stable
Rating Watch YES -

The global feed industry can be valued at around ~$460bln, with poultry (~$166bln) constituting ~36% of the total industry. Pakistan has installed poultry feed production capacity of ~ 8mln MT/year with a total of ~150 registered feed mills and ~200 unregistered feed mills catering to it. The industry generates an estimated annual revenue of ~ PKR 100bln from local sales to poultry farms. Lately, due to Covid-19 outbreak, restaurants, marriage halls and other public places have been closed. This, along with no exports of poultry products, have led to supply glut in local market. Prices of poultry products posted a dip, despite being an essential food item, due to lower demand with many poultry farms becoming non-operational. Subsequently, sale of feed and recovery from farms is expected to remain under pressure. Although feed producers have sufficient inventory and oversupply has reduced slightly, lower sales and liquidity crunch are expected to significantly impact the industry. Recent SBP measures will provide some respite in the short-time. However, prolonged closure of key revenue generating channels will affect sales in the entire poultry chain.

The ratings reflect Sadiq Feeds (Pvt.) Ltd.'s ('Sadiq Feeds" or "the Company') association with an established poultry group, Sadiq Group. The Company is part of the Group’s integrated poultry chain – oil/meal, feed and poultry. Topline is concentrated towards broiler feed with sales to group companies as a major source. The Company remains exposed to inherent risks in the feed industry emanating from raw material price changes and lately low demand due to COVID-19 outbreak. Although the Company enjoyed good margins and profitability in 9MFY20, sales have slowed down considerably in the 4QFY20 subsequent to lockdown leading to lower capacity utilization and off take. This trend has eased to an extend but demand is expected to remain low until lockdown eases and demand centers (restaurants, banquet halls etc.) reopen. The Company procures raw material in bulk due to seasonal constraints. This highlights inherent price risk along with storage issues and high holding period. Financial risk profile of the Company is characterized by modest coverages. However, leveraging remains high, mainly on account of working capital requirements. The loan mix is skewed towards short term borrowings. The Company intends to avail debt relief measures announced by SBP through deferment and restructuring of certain loans. This is expected to provide relief in terms of debt servicing and ease pressure on cashflow. Further, lower interest cost due to cumulative policy rate cuts of 626bps will lessen debt servicing burden materially. The ratings incorporate potential support from sponsors and/or group companies. The Negative Outlook and 'Rating Watch' signify adverse impact of COVID-19 outbreak, economic slowdown and prevailing uncertainty. PACRA will monitor the situation closely and update the ratings accordingly.
The ratings are dependent on the management's ability to sustain its operations and improve capacity utilization. Maintaining strict working capital discipline through prudent inventory management and strict adherence to new loan profiling remain critical. Any significant deterioration in margins and/or prolonged low sales cycle will have negative impact on the ratings. Support from sponsors is important.

About the Entity
Sadiq Feeds (Pvt.) Limited, was incorporated in 2005 and is primarily engaged in three different types of feeds - poultry feed, strain specific layered feed and cattle feed for birds and livestock of different types and age groups. The Company has two feed manufacturing facilities situated in Mandra and Sahiwal, with a production capacity of 70 MT per hour and 130 MT per hour, respectively. The quality of feed produced is ranked best among competitors.

Sadiq Feeds present shareholding structure suggests that Dr. M. Sadiq, is the man at the last mile, as he holds the major shares. For the time being, remaining stake resides with his two sons Mr. Asif Zubair and Mr. Salman Sadiq. Sponsoring family dominates the board of Sadiq Feeds and comprises three members. Board’s Chairman and Company's CEO, Dr. Muhammad Sadiq, plays a pivotal role in strategic decisions.

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.