JCR-VIS Assigns Initial Entity Ratings to Al-Makkah Oil Refinery Limited

Karachi, July 12, 2018 (PPI-OT): JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘BBB-/A-2’ (Triple B Minus/A-Two) to Al-Makkah Oil Refinery Limited (AOL). Outlook on the assigned ratings is ‘Stable’. Set up in 2014, AOL is engaged in manufacturing and selling of vegetable banaspati. The assigned ratings derive strength from established track record of sponsors in the edible oil business and favourable demand prospects for edible oil in the domestic market.

AOL is moderately capitalized with low debt and adequate liquidity profile. Ratings also draw comfort from availability of 100% tax credit over the ratings horizon. The ratings are, however, constrained by high business risk profile of the edible oil industry while management may consider strengthening of the company’s governance structure.

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 thin profitability. Demand is segmented into high end brand franchises, middle tier and low end brands, with growth prospects in all segments. Changes in regulatory regime may have an adverse impact on the sector. Moreover, variation in raw material prices and foreign exchange rate fluctuations are key risk factors resulting in volatility in margins. Ability to manage the same depends on pass through of final product prices to consumers, which in turn, is linked to degree of competition and operational efficiency.

AOL’s products are sold under “Karwan” and “Kamran” brands, among various other brands. Since inception, sales revenue of AOL has augmented largely on the back of volumetric growth while prices varied in line with market dynamics. Gross margins have also increased, though depicting significant room for improvement in relation to peers. Given tax credit and low financial charges, cash flows are expected to remain a function of variation in gross margins. Accordingly, trend depicted by AOL’s margins in the backdrop of competitive industry dynamics and improvement in corporate framework of the organization would be the key rating sensitivities.

For more information, contact:
CFA
JCR-VIS Credit Rating Company Limited
VIS House, 128/C,
25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: sobia@jcrvis.com.pk