The Pakistan Credit Rating Agency Limited
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Shayan Farooq

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PACRA Maintains Entity Ratings of Pak Arab Fertilizers Limited

Rating Type Entity
(25-Jan-22 )
(30-Jul-21 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Developing Developing
Rating Watch - Yes

Pakistan has an agrarian economy, thus fulfills around ~ 84% of its fertilizer requirement through local production while the remaining is met through imports. The Country's total fertilizer production capacity stands at around ~ 7.1mln MT of Urea and CAN and ~ 1.7mln MT of DAP, NP, and NPK. In CY21, Urea’s offtake stood at ~6.3mln MT. The availability of urea was estimated on the basis of the Economic Coordination Committee's decision that allows urea plants to operate on subsidized LNG up to Mar-22. Unavailability of LNG has created supply uncertainty of urea for the ongoing Rabi Season 2021-2022, thus the Federal Government has decided to import 0.1mln MT of urea from China. Meanwhile, DAP’s offtake stood at 2.5mln MT. Despite the increase in gas prices, overall margins of the industry remained healthy mainly due to the increase in prices of fertilizer products. In the international market, prices of Urea and DAP witnessed an upward trend supported by increased demand. Going forward, the industry’s outlook is expected to remain satisfactory.
The ratings reflect Pak Arab Fertilizers Limited's ('Pak Arab' or 'the Company') association with strong business Groups namely, Fatima Group and Arif Habib Group. As per the Group level strategic plan, the fertilizer production and operating plants of Pak Arab, have been completely transferred to Fatima Fertilizer Company Limited ('Fatima Fertilizer') on Sep-20. The Company has received the complete consideration, in this regard, from Fatima Fertilizer till Dec-21. Currently, the topline comprises DAP trading and sale of Liquid Carbon dioxide (LCO2), along with other non-core services. Pak Arab's margins are squeezed, but are expected to stabilize. Financial risk profile is characterized by stressed coverage ratios. While the working capital cycle remains stable. Pak Arab has a highly leveraged capital structure with considerable borrowings on its balance sheet. However, the borrowings have been on a declining trend. To further elevate the stress on the Company's cashflow, the loan is partially guaranteed by Fatima Fertilizer. The ratings draw comfort from the sponsor's financial strength, guidance on managing interest rate fluctuation, and demonstrated ability to provide support if needed. However, the Company has been assigned with a 'Developing' outlook, as the profitability and cashflows are expected to stabilize going forward. Developing a sizeable and sustainable revenue stream after asset sale to Fatima Fertilizer remains critical for ratings.
The ratings are dependent on the management's ability to manage business risk while improving business margins in prevailing challenges. Going forward, generating sustainable operational cashflows is important. Meanwhile, a prudent financial strategy to meet financial obligations remains imperative. Continued support from Fatima Fertilizer, technically and financially, is critical for ratings.

About the Entity
Pak Arab Fertilizers Limited ('Pak Arab' or 'the Company') is a Public Unlisted Company. The Company engaged in importing and trading of DAP, manufacturing and selling Liquid Carbon Dioxide (LCO2), along with providing Operations & Maintenance services. The Company's LCO2 plant is located at Sadiqabad, within the premises
of Fatima Fertilizer, and has a production capacity of 192MT/per day.
Pak Arab is owned by Arif Habib Group (50%), Fatima Group (41%), and Fazal Group (9%). The Company's Board is chaired by Mr. Arif Habib. While Mr. Fawad Ahmed Mukhtar heads the Company as its CEO. He is aided by a team of experienced professionals.

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.