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The Pakistan Credit Rating Agency Limited
Press Release

Date
28-Nov-23

Analyst
Muhammad Zain Ayaz
zain.ayaz@pacra.com
+92-42-35869504
www.pacra.com

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PACRA Assigns Entity Ratings to Khadija Edible Oil Refinery (Pvt.) Limited

Rating Type Entity
Current
(28-Nov-23 )
Action Initial
Long Term A-
Short Term A2
Outlook Stable
Rating Watch -

Pakistan's edible oil industry is heavily reliant on imports since oilseeds and edible oil account for ~80% of the cost of production. Edible oil is one of the highest imported commodities in Pakistan. Assuming the Genetically Engineered (GE) import ban is removed by third quarter FY23, total oilseed imports are forecasted to reach 2.6 million tons in FY24, which would be 71% higher than the estimated use for FY23. In line with population growth, edible oil demand is forecast to grow about 5%, and palm oil imports are forecast to grow accordingly, reaching 3.6 million tons in FY24. The price of Soybean oilseed stood at 1200 USD/MT in Jun-23, whereas the price of Palm Oil stood at 800 USD/MT in Jun-23, forecasted to ease further. Comparatively higher selling prices have increased revenues substantially for the refineries. Due to the rise in input costs, especially raw material cost, many companies have experienced a reduction in their profit margins and faced working capital shortages. With expectations for better cottonseed production, total oilseed production in FY24 is projected to increase to 2.95 million tons, 24% above than of FY23. This has given local extraction units and refineries hope that import substitution will ensure smooth operations and reduce supply constraints of oilseed. Higher selling prices have increased revenues substantially for the refineries; despite the rise in input costs could not be fully covered and gross profit margins have also been reduced Future outlook look of the industry is developing due to price volatility and PKR depreciation.
The ratings reflect Khadija Edible Oil refinery(Pvt.) Limited's established brand equity for its premium brands (Fauji Supreme, Islamabad, Perlli, Phool, Zeenat). With a relatively adequate market share, the Company has experienced growth in its top-line owing to stable demand growth in refined and branded edible oil and shortening. The company has demonstrated healthy profit margins, in comparison with its industry peers, as a result of value addition in the products and cost control management. However, the company maintains an aggressive market strategy, relying on short-term borrowings to meet its working capital requirements. The Company's topline posted growth of ~42% and reported at ~PKR 20bln during FY23 (FY22: ~PKR 14bln). However, the refined and branded edible oil segment remains competitive where volumes and margins are functions of timeliness and prudence of raw materials procurement. The Company has an adequately leveraged capital structure, and high asset turnover ratio, representing strong capacity utilization and a notable reliance on internal equity. Resultantly, the Company's financial risk remains low supplemented by strong coverages and a healthy capital structure. The sponsors derive substantial support from the diversity through construction and terminal business.
The ratings are dependent on the management's ability to maintain its growing business volumes while sustaining margins and profitability. Prudent management of working capital and maintaining strong coverages is critical. Brand reputation and customer retention provide support to the ratings.

About the Entity
Khadija Edible Oil Refinery (Pvt.) Limited ('Khadija edible oil' or ‘the Company’) was incorporated in Dec-2005 as a Private Limited Company under the repealed Companies Ordinance 1984 (Now Companies act 2017). The Company is primarily engaged in the process of refining crude palm oil; producing and selling cooking oil/ghee along with shortening. The Company’s majority ownership resides with group company, Waheed Hafeez Ghee Industries (Pvt.) Limited (~87%). The remaining shareholding resides with Mr. Abdul Waheed (~13%).

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.