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
(30-Jul-21 )
(21-Aug-20 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Developing Developing
Rating Watch Yes 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 sails around ~ 7.1mln MT of Urea and CAN and ~ 1.7mln MT of DAP, NP, and NPK. In 5MCY21, Urea’s offtake stood at 2.2mln MT. Meanwhile, DAP’s offtake stood at 423,000MT. The overall margins of the industry registered a healthy growth on the gross and net levels due to unchanged gas rates and effective cost controls despite inflationary pressures. In the local market, Urea's price has slightly decreased. Earlier, the GIDC charge was reduced on feed and fuel stock. Subsequently, the GIDC was made payable in full by all manufacturers in 48 installments, as per the ruling of the Supreme Court in Aug-20. In the international market, prices of Urea and DAP witnessed an upward trend supported by increased demand after due to high input cost. However, the expected Government subsidy scheme would reduce DAP prices. Going forward, 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 production and operating plants of Pak Arab, including Urea, Ammonia, Nitric Acid, NP, and CAN, have been completely transferred to Fatima Fertilizer Company Limited ('Fatima Fertilizer') on Sep-20. The Company has received ~ 87% of the consideration, in this regard, from Fatima Fertilizer till Jun-21. The remaining installments are expected to complete by CY21. Currently, the Company's topline comprises DAP trading and sale of Liquid Carbon dioxide (LCO2), along with other non-core services. Pak Arab's margins are squeezed and are expected to remain low. The Company's 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, to elevate the stress on the Company's cashflow, the loan is fully 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. The Company has been assigned 'Rating Watch' with a 'Developing' outlook as the profitability and cashflows are expected to remain under stress. Developing a sizeable and sustainable revenue stream after asset sale to Fatima Fertilizer remains critical for ratings. 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 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.