Karachi, May 29, 2018 (PPI-OT): JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘BBB/A-3’ (Triple B/A-Three) to Habib Oil Mills Limited (HOM). Outlook on the assigned ratings is ‘Stable’. HOM is involved in the manufacture and sale of vegetable banaspati, cooking oil and related products for over six decades. The company is owned by the Hassan Family and based in Karachi.
The assigned ratings incorporate established track record of sponsors in the edible oil business, strong market position, significant brand recognition of products, projected improvement in financial profile post expansion and favourable demand prospects for edible oil in the domestic market. The ratings are, however, constrained by high business risk profile of the edible oil industry along with weak financial profile of HOM as reflected by high leverage and stressed liquidity indicators.
Pakistani edible oil industry is characterized by high competitive intensity due to fragmentation and low barriers of entry which result in limited pricing power and inherently thin profitability. However, several large players have been operating for a long period of time and thus enjoy stronger brand equity in relation to other firms. Over the medium to long-term, demand is expected to increase in line with GDP growth which is further supported by positive demographic fundamentals. Nevertheless, changes in raw material prices (resulting in inventory losses) and foreign exchange rate fluctuations are key risk factors resulting in volatility in margins. Ability to manage the same depends on pass through to consumers, which in turn, is linked to degree of competition and operational efficiency.
HOM’s turnover has depicted growth over the past three fiscal years. However, growth in revenues has not translated into a similar increase in profitability as a result of decline in margins and sizeable tax burden. Thus, equity base of HOM has remained largely stagnant. In contrast, borrowing levels have increased on a timeline basis due to higher stock levels and increase in trade debts. Accordingly, gearing levels have increased. Liquidity and capitalization indicators have depicted some improvement in the ongoing year due to implementation of a revised business strategy. Ageing profile of trade debts is considered manageable with a limited proportion of receivables being overdue for over three months.
Going forward, the company plans to set up an oil seed crushing facility and extraction plant with capacity of 500 metric tonnes per day at Port Qasim, Karachi. As per the feasibility plan, existing manufacturing arm will entirely be shifted to the new site. Expected date of completion is June’ 2019. The project is envisaged to improve profitability through backward integration, lower freight costs due to closer proximity to Port Qasim and tax benefits under Section 65E of Income Tax Ordinance.
The company will obtain long-term debt which will be repayable from FY20 onwards for a period of 5 years with 1-year grace period. Remaining cost will be funded by sponsors’ equity injection. Given projected increase in margins and lower tax burden post expansion, cash flows and debt servicing ability are expected to improve over the rating horizon. Going forward, timely project completion and realization of projected financial indicators would be the key rating sensitivities.
For more information, contact:
JCR-VIS Credit Rating Company Limited
VIS House, 128/C,
25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi