The Pakistan Credit Rating Agency Limited
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Shayan Farooq

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PACRA Maintains Entity Ratings of Sadiq Oil Extraction (Pvt.) Limited

Rating Type Entity
(06-Aug-21 )
(11-Feb-21 )
Action Maintain Downgrade
Long Term BBB- BBB-
Short Term A3 A3
Outlook Stable Stable
Rating Watch - Yes

The ratings reflect Sadiq Oil’s ('Sadiq Oil' or 'the Company') association with an established and integrated poultry group, Sadiq Group. The Group has a significant presence along the poultry supply chain and Sadiq Oil supports its vertical integration strategy. Initially, venturing into the branded oil segment (SB Gold) benefitted the Company. However, the Company's topline contracted and stems from the refining segment only. As their solvent extraction plant is non-operational since Aug-20, the Company is relying on external sources, for semi-refined oil, to manage the operations of its refining segment. On the industry front, demand for edible oil was impacted minimally due to the closure of marriage halls and restaurants during most FY21. Being a staple food item, edible oil demand from households did not drop. Players had sufficient inventories to fulfill demand. Lately, demand from all avenues has picked up. However, the high dependence on imported raw material, oilseed, exposes players to volatility in international oilseed prices and the inherent risk of currency fluctuations. Since Jul-20, soybean oilseed prices have surged by ~59%, however, were passed on to the end consumers. Currently, Sadiq Oil's revenue, and in turn margins are squeezed. Until the extraction plant becomes fully operational, sales and recovery of soy meal are expected to remain under pressure. Going forward, players in the refining segment may benefit from an increase in refined edible oil and meal prices. However, branded and packaged oil segment is expected to remain competitive. The Company's financial risk profile is characterized by high borrowings used to finance working capital requirements. Lately, the Company has off-loaded significant debt on its balance sheet providing the requisite respite. However, coverages remain stressed due to low profitability. The working capital cycle remains stretched but drives comfort from Groups integrated presence in the poultry sector. This along with debt relief measures of SBP through deferment/restructuring of loans and the low-interest rates has benefited the Company's borrowing cushion. This creates room to begin crushing in near future.
The ratings are dependent on the management's ability to manage business risk while improving margins in prevailing challenges. Moreover, the governance framework needs attention. Going forward, generating sustainable operational cashflows is important. Meanwhile, a prudent financial strategy to meet financial obligations remains critical. Resumption of solvent extraction is crucial for the ratings.

About the Entity
Sadiq Oil was incorporated in 2013 and is primarily engaged in oilseed filtering and crushing, oil extraction, and refining. Presently, the Company has two solvent extraction plants with a crushing capacity of 600 MT/day. While the chemical refinery can semi-refine up to 300 MT/day. Physical refinery has a refining capacity of 200 MT/day, while. Ghee plant has 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).
Previously, Dr. M. Sadiq held major shareholding (90.6%) of the Company, followed by his two sons, Mr. Asif Zubair (3.8%) and Mr. Salman Sadiq (5.5%). Post Dr. M. Sadiq's demise, shareholding vests with Mrs. Saadia Sadiq (22%) and her sons: M. Arsal (25%), M. Sanan (27%), and M. Saad (27%).

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.