PACRA Assigns Initial Ratings to Engro Fertilizer Limited - PPSTS - PKR 20bln

Engro Fertilizers Limited (‘Efert’ or ‘the Company’) ratings reflect strong sponsorship of the company: Engro Holdings, which is one of Pakistan’s leading groups, having a strategically diversified business portfolio. EFert benefits from a strong business model underpinned by the inherent strength of its products and operational efficacy. The ratings incorporate the low business risk profile of the fertilizer industry, reinforced by the growing strategic importance of food security in the evolved global scenario. Urea is one of the major inputs to crops produced in Pakistan, followed by DAP. In CY24, the quarterly sales analysis of the Company depicted a rising trend of turnover and improved margins, especially in 4Q. The 2Q was the lowest in profitability. Nevertheless, the overall profits were maintained in 2024 in an absolute sense. In 1QCY25, reported turnover and margins reflected dilution, attributable to muted demand. The reported inventory levels in 1QCY25 were high, generally across the industry, and more so for EFert. The management has represented that this is a seasonal impact and it would get settled over the next six months, along the lines of the proposed debt instrument. EFert has sustained high operational efficiency through continuous investments in plant optimization, translating into higher utilization capability and extended operational run times. EFert has a sound financial structure, characterized by the fundamental nature of the underlying sector. The strain on the financial metrics in the recent period is noticeable, which, as per management projections, would subside in the coming quarters, based on the anticipated rise in sales. The higher utilization of short-term borrowings is attributed to this phenomenon. The planned privately placed short-term sukuk is expected to provide financial flexibility, given the prevailing market conditions. Cash flow generation was very strong in CY24, and with this capability, managing the current fiscal pressure is not a major challenge. Hence, the future anticipated sales pattern remains imperative. Profit margins are largely influenced by the spread between fertilizer prices and natural gas costs, making cost volatility a significant risk factor. EFert’s capital structure remains conservatively leveraged on the long-term debt. Hence, management of the short term debt seems essential.
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About the Entity
EFert was incorporated in 2009 as a listed company with a primary objective of manufacturing and marketing urea and other fertilizers. The Company has three production facilities, with the designed annual capacity of the base plant is 975,000 MT, Enven is 1,300,000 MT, and NPK is 100,000 MT. While DAP is imported. EFert is majorly (~56.3%) owned by Engro Holdings through Engro Corporation Ltd., while insurance companies hold ~8.3%, followed by mutual funds (~2.2%) and financial institutions (~1.8%). The general public holds ~20.9% stake. Mr. Ahsan Zafar Syed chairs the Board, while Mr. Ali Rathore heads the Company as the CEO.

About the Instrument
EFert is set to issue a Privately Placed Short Term Sukuk (PPSTS) with an issue size of PKR 20bln, including a green shoe option of PKR 5bln, for a tenor of 6M from the issue date. It carries a profit rate of 3MK less 0.15% and will be repaid as a bullet payment on maturity. The proceeds will replace the utilization under existing short-term bank limits obtained to manage EFert's working capital requirements.