Lahore, August 09, 2021 (PPI-OT):The ratings reflect Sadiq Oil’s (‘Sadiq Oil’ or ‘the Company’) association with an established and integrated poultry group, Sadiq Group. The Group has a significant presence along the poultry supply chain and Sadiq Oil supports its vertical integration strategy. Initially, venturing into the branded oil segment (SB Gold) benefitted the Company. However, the Company’s topline contracted and stems from the refining segment only. As their solvent extraction plant is non-operational since Aug-20, the Company is relying on external sources, for semi-refined oil, to manage the operations of its refining segment. On the industry front, demand for edible oil was impacted minimally due to the closure of marriage halls and restaurants during most FY21.
Being a staple food item, edible oil demand from households did not drop. Players had sufficient inventories to fulfill demand. Lately, demand from all avenues has picked up. However, the high dependence on imported raw material, oilseed, exposes players to volatility in international oilseed prices and the inherent risk of currency fluctuations. Since Jul-20, soybean oilseed prices have surged by ~59%, however, were passed on to the end consumers. Currently, Sadiq Oil’s revenue, and in turn margins are squeezed. Until the extraction plant becomes fully operational, sales and recovery of soy meal are expected to remain under pressure.
Going forward, players in the refining segment may benefit from an increase in refined edible oil and meal prices. However, branded and packaged oil segment is expected to remain competitive. The Company’s financial risk profile is characterized by high borrowings used to finance working capital requirements. Lately, the Company has off-loaded significant debt on its balance sheet providing the requisite respite. However, coverages remain stressed due to low profitability. The working capital cycle remains stretched but drives comfort from Groups integrated presence in the poultry sector. This along with debt relief measures of SBP through deferment/restructuring of loans and the low-interest rates has benefited the Company’s borrowing cushion. This creates room to begin crushing in near future.
The ratings are dependent on the management’s ability to manage business risk while improving margins in prevailing challenges. Moreover, the governance framework needs attention. Going forward, generating sustainable operational cashflows is important. Meanwhile, a prudent financial strategy to meet financial obligations remains critical. Resumption of solvent extraction is crucial for the ratings.
For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com