Lahore, January 11, 2021 (PPI-OT): Pakistan’s edible oil industry is heavily reliant on imports since key imported raw materials account for ~80% of the cost of production. Additionally, low domestic oil seed production and lower yields have pushed farmers away from oil seed, further increasing dependence on imports. Demand for edible oil along with sales and recovery of soy meal was impacted during lockdown in the later half of FY20 due to Covid outbreak. However, being a staple food item, edible oil demand from household did not drop. Lately, demand from all avenues for edible oil has picked up. Also, soy meal recovery has improved supported by increase in demand, in turn prices of poultry products.
On the supply side, the key raw materials – oil seed – are imported primarily from USA and Brazil. Industry players have sufficient inventories to fulfill demand. International prices of soybean oil seed have picked up (~51%), during FY21, while the rupee has depreciated around 9% since Jan-20. Sales are expected to remain stable. Margins and profitability will improve for players in soybean oil segment. This along with interest rate cut and SBP initiatives like restructuring/deferment of loans will provide sufficient respite to the industry players.
The rating reflects Jadeed Oil’s association with Jadeed Group, a leading and integrated player in the poultry supply chain. The Group has significant presence along poultry supply chain as it imports and breeds grandparent poultry stock. Jadeed Oil supports the Group’s vertical integration strategy. The Company’s business line includes two main products: soybean meal and soybean edible oil. Jadeed Oil began crushing in Jul-19. At present, the Company has a small topline dominated by soy meal sales, only to its Group Company. While, refined edible oil is sold in bulk. Sales are expected to post stable growth, on the back of significant demand for soy meal.
Margins are currently thin, however, are expected to improve once extraction capacity will be streamlined. This would also result in the rise of production volumes. Inventory management system and related efficiencies would require the Company’s attention to keep its working capital costs low. Being an importer of Soybean oilseed in Pakistan, the Company remains exposed to the inherent risk related to currency fluctuations and prices of raw material. Financial risk profile of the Company is characterized by high leveraging, to fund increasing working capital needs. Interest rate cut is expected to improve the coverages.
The ratings are dependent on the management’s ability to prudently manage the liquidity and debt profile of the Company, while improving sales and margins. Envisaged improvement in business and financial profile along with effective changes in governance framework would be good. Any prolonged deterioration in revenues and/or coverages will adversely impact the ratings.
For more information, contact:
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425