Press Release

JCR-VIS Assigns Initial Ratings to Habib Oil Mills Limited
 

Karachi, May 29, 2018: 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 favorable 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 further information on this rating announcement, please contact Mr. Javed Callea (Ext: 201) at 021-35311861-71 or fax to 021-35311872-3.


Javed Callea
Advisor

Applicable Rating Criteria: Industrial Corporates (May 2016)
http://www.jcrvis.com.pk/docs/Corporate-Methodology-201605.pdf

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Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. JCR-VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report. JCR-VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings. JCR-VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2018 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.

JCR-VIS Credit Rating Company Limited