The Pakistan Credit Rating Agency Limited
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Shazia Afzal

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PACRA Maintains Entity Ratings of Engro Fertilizers Limited

Rating Type Entity
Action Maintain Maintain
Long Term AA AA
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

The ratings take account of sustained operations of Engro Fertilizers Limited (referred as "Engro"); capacity utilization at both plants remained good on the back of continued gas supply and plant efficiencies, evidenced from a record high production of urea in 1QCY20. In fertilizer Industry, Engro is among the companies that benefits from the incentivized gas pricing of 70 cents per mmbtu, under the fertilizer policy 2001, hence reaping strong margins. Lately, Pakistan's urea market has witnessed certain key changes on the pricing front.In January 2020, the Government reduced GIDC on the fertilizer sector to PKR 5/MMBTU in an attempt to improve farm economics by way of reducing urea prices. Welcoming the decision of the government to reduce GIDC, Engro Fertilizers Limited was the first company to have fully passed on the benefit by decreasing Urea prices by PKR 160/bag, given its gas mix. In addition to this, the Company volunteered to further reduce its prices by PKR 240/Bag in March 2020 to help alleviate the adverse impact of a global pandemic on the nation. The additional price cut resulted in an overall price reduction of PKR 400/Bag since the beginning of the year.Subsequently, the Industry experienced a wave of price disparity due to varying price cuts in 1QCY20; though, it did not hold longevity. As a result, Engro's market share took a dip in 1QCY20, which is expected to revive in the coming periods. By end of march the price disparity was eliminated in the industry, in order to benefit the farmer community at large. On the flip side, the Industry's urea offtake reflected an uneven Month-on-Month (MoM) trend, majorly owing to the outbreak of COVID-19 pandemic and the consequential lockdown. Overall demand remained largely stable. Moreover, proactive strategies are necessitated to prevent the risk of locust swarms to the agricultural industry. Engro's financial risk profile is characterized by moderate leveraging, which has turned out to be a function of management strategy for balance sheet efficiency. Engro continues to derive strength from its association with Engro Corporation Limited (ECorp) – a corporate conglomerate. The Company is also diversifying its product portfolio into other agri based products.
The ratings are dependent on sustainability of operations and upholding of the Company's market share in the urea industry. Any constraint to perceived ability to keep the business and financial risks in respective matrix may impact the ratings.

About the Entity
Engro is ~56% owned by ECorp, a corporate conglomerate with a consolidated asset base of PKR~581bln and revenue base of PKR~45bln at End-March'20. ECorp is majority (45%) owned by DH Corp. Engro's urea plants (with nameplate capacity base of 975k MT), Enven 1,300k MT) and specialized fertilizer plant are located at Daharki and Port Qasim, respectively. The Company's Board comprises three Engro executives, one non executive and three independent directors. Mr. Ghias Khan, the CEO of the parent company, is the Chairman of the Board. Mr. Nadir Salar Qureshi, a seasoned professional, previously Chief Strategy Officer at ECorp, is the President & CEO of Engro Fertilizers.

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.