The Pakistan Credit Rating Agency Limited
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Usama Zahid Sarhandi

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PACRA Maintains Entity Ratings of Engro Fertilizers Limited

Rating Type Entity
(29-Jul-21 )
(29-Jul-20 )
Action Maintain Maintain
Long Term AA AA
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

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 ~ 6.9mln MT of Urea 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, as it is largely utilized in the Rabi Season. The industry's overall margins posted healthy growth in gross and net levels due to unchanged gas rates, low fuel cost, and interest rates. In the local market, Urea's price has slightly decreased. Last year, the GIDC rate was reduced on feed and fuel gas and the industry reduced the Urea prices. However, as per the ruling of the Supreme Court in Aug-20, the further charge of GIDC was stopped and liability was made payable in full by all manufacturers in 48 months. Moreover, the subsidy of PKR1000/50KG on DAP by GoP may bring its price down by ~25%. In the international market, prices of Urea and DAP witnessed an upward trend. Going forward, Urea's and DAP inventory is expected to be adequate.
The ratings reflect Engro Fertilizers Limited's ('EFert' or 'the Company') sound risk profile. EFert derives strength from its parent company i.e., Engro Corporation Limited ('Engro Corp'), the largest conglomerate in Pakistan. The Company's capacity utilization of both Urea and NPK remained strong, primarily attributable to continued gas supply and improved plant efficiencies, evident from highest ever production of Urea during CY20. The Company reaps benefit from the incentivized gas pricing. Lately, the Company is pursuing extension of concessionary gas till the number of days for which supply of gas was curtailed. EFert continues to increase its top-line backed by volumetric growth. The Company has also diversified its product portfolio into other agri-based products and has maintained healthy margins and profitability, over the years. Moreover, stable income from the subsidiary company from other sources provide support to the Company's bottom line. The Company has a moderately leveraged capital structure with very strong coverages and significant liquidity leading to a robust financial profile. Ratings draw comfort from sponsor's business acumen and their widespread reach. Strong governance framework adds strength to the Company's profile. The Company has received numerous corporate awards.
The ratings are dependent on the sustainability of operations and maintaining its market share. Sustainability in the performance of subsidiaries, stable dividends, and effective management of financial profile is important. Prudent management of the working capital, cash flows, and coverages are imperative for the ratings.

About the Entity
Engro Fertilizers Ltd. is a public listed company, incorporated in 2009, post demerger from parent company Engro Chemical Pakistan Ltd. e.f. Jan-10. EFert is engaged in the manufacturing, purchasing, and marketing of fertilizers, seeds, and pesticides and providing agri services. The Company has three plants, out of which two Urea plants are located at Daharki (Base plant and EnVen) and one NPK plant is located at Port Qasim, Karachi. The total designed capacity of EFert’s Urea plants is 2.275mln MT. NPK has a total capacity of 100,000MT. The utilization level for Urea and NPK stood at ~99.5% and ~127%, respectively.
EFert is majorly owned by Engro Corporation Ltd. (Engro Corp) (~56%), the largest conglomerate in Pakistan. The rest of the ownership lies with the general public (~19%), financial institutions (~4%), mutual funds (~3%), insurance companies (~2%), and others (~16%). The Company's Board is chaired by Mr. Ghias Khan, whereas, Mr. Nadir Salar Qureshi heads the Company as the Chief Executive Officer. 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.