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The Pakistan Credit Rating Agency Limited
Press Release

Date
07-Aug-20

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

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PACRA Maintains Entity Ratings of Sadiq Oil Extraction (Pvt.) Limited, Assigns 'Rating Watch', Outlook 'Negative'

Rating Type Entity
Current
(07-Aug-20 )
Previous
(10-Aug-19 )
Action Maintain Maintain
Long Term BBB BBB
Short Term A2 A2
Outlook Negative Stable
Rating Watch Yes -

Pakistan's edible oil industry is heavily reliant on imports since key imported raw materials account for ~80% of the cost of production. Additionally, low domestic oil seed production caused by a distortion in support price mechanism and lower yields have pushed farmers away from oil seed, further increasing dependence on imports. Amidst the COVID-19 outbreak, demand has been impacted due to closure of restaurants and banquet halls. However, being a staple food item, demand from household is not likely to drop. Meanwhile, sale and recovery of soy meal has been affected due to unfavorable circumstances of poultry and feed sector. On the supply side, the key raw materials – oil seed and RBD palm oil – are imported primarily from the USA, Brazil and Malaysia. Industry players have sufficient inventories to fulfill demand. International prices of soybean oil seed have dropped (~5%) slightly. Palm oil prices saw steeper decline (~20%), while the rupee has depreciated around 9% since Jan-20. Sales may remain under pressure due to prolonged closure of banquets and restaurants. However, branded and packaged oil segment is expected to remain competitive. Margins and profitability may reduce for players in soybean oil refining segment. However, players refining crude palm oil and making ghee may benefit from lower prices once existing inventory is diluted. Interest rate cut and SBP initiative steps like restructuring/deferment of loans will provide some respite in the short-time.
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. After venturing branded oil segment (SB Gold), increase in utilization levels of extraction plants resulted in higher production volumes, in turn, sales. Margins decreased, and remain volatile due to international oil seed prices. The Company imports oil seeds (Soybean, Canola and Sunflower), thus is exposed to the inherent risk of currency fluctuations and prices of raw material. Sales of Soy Meal are expected to remain under pressure. Financial risk profile of the Company is characterized by high leveraging – both to fund the increasing working capital needs and expansion activities. Coverages have declined and remain on the lower side. Working capital cycle remains stretched but drives comfort from Groups integrated presence in poultry sector. The Company has availed SBP relief measures through deferment/rescheduling of loans. This, coupled with significant interest rate cut, will provide relief in cashflows.
The ratings are dependent on the management's ability to prudently mange the liquidity and debt profile of the Company, while improving sales and margins. Any prolonged deterioration in revenues and/or coverages will impact the ratings. Envisaged improvement in business and financial profile along with effective changes in governance framework would be beneficial.

About the Entity
Sadiq Oil Extraction (Pvt.) Limited, was incorporated in 2013 and is primarily engaged in the process of oilseed filtering and crushing, oil extraction and refining by mechanical and chemical processes. For this, it imports 90-95% premium quality oilseeds. At present, the Company has two solvent extraction facilities with a crushing capacity of 600 MT/day. While the chemical refinery can semi-refine the edible oil up to 300 MT/day. The Company has set up a physical refinery with a refining capacity of 200 MT/day. The Company has set up a Ghee plant with 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).
Sadiq Oil's present shareholding structure suggests that Dr. M. Sadiq, is the man at the last mile, as he holds 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 Oil and comprises three members. Board’s Chairman and the Company's CEO, Dr. Muhammad Sadiq, plays a pivotal role in making 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.