PACRA Assigns Initial Entity Ratings to Pakistan Oil Mills (Pvt.) Limited

Pakistan's edible oil industry is heavily reliant on imports since oilseeds account for ~80% of the cost of production. Edible oil is the country’s 2nd largest import after petroleum. Pakistan’s total oil and fats consumption is ~ 5 million metric tons per annum and its per capita consumption is ~22 kg. Consumption is met by 70% (~3.3 MMT) of edible oil import. The remaining 30% (~1.7 MMT) of edible oil is produced from oilseeds (local ~ 3.5MMT, imported ~ 3.1 MMT). Additionally, low domestic oilseed production in Pakistan caused by a distortion in support price mechanism and lower yields have pushed farmers away from oilseed, further increasing dependence on imports. Post Jan-21, demand for edible has picked up due to the reopening of demand avenues. On the supply side, the key raw materials – oilseed and RBD palm oil – are imported primarily from USA, Brazil, and Malaysia. Since Dec-20, raw material prices have continued to inflate amid supply uncertainties and historically low global inventory levels, along with rupee devaluation impacting importers. Subsequently, prices of cooking oil and vegetable ghee have remained on the higher side. Going forward, sales are expected to remain stable. Margins and profitability are expected to improve for players and costs will be offset by the increased demand and in turn prices.
The ratings reflect Pakistan Oil Mills (Pvt.) Limited's ('the Company') developing brand equity for its edible oil brands (Naz, Pak, Sun, and Pure) and its association with a leading industrial group that has ventured into shipbreaking, textile, and real estate. Over the years, the Company has been able to integrate backwards into oilseed crushing along with expanding its refining capacity. 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 meal segments. However, refined and branded edible oil segment remains competitive where volumes and margins are functions of timeliness and prudence of raw materials (Canola oilseed and RBD Palm olein) procurement. The Company procures raw material in bulk due to seasonality constraints, posing an inherent price risk along with storage issues and a high holding period. This has been managed well by the Company and has yielded positive results while augmenting profitability. The Company has a modest capital structure supplemented by strong coverages and a healthy working capital cycle, which keeps the financial risk low. Demonstrated support from sponsors bode well for the Company's ratings.
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. Effective changes in governance framework would be beneficial for the ratings. Any prolonged deterioration in revenues and/or coverages will adversely impact the ratings.

About the Entity
Pakistan Oil Mills (Pvt.) Limited was incorporated in April, 1960 as a private limited company. The Company primarily sells vegetable oil/ghee, canola meal, and other byproducts including laundry soap. The Company’s production facility is located in Kotri, Sindh with oilseed crushing capacity of 400MT per day and refining capacity of 280MT per day.
The Company’s major ownership resides with Mr. Masood Pervez (64%) and Mr. Muhammad Usman (33%). Mr. Masood chairs the Company's Board, and is also the CEO. He is assisted by an experienced team.