Karachi, March 16, 2022 (PPI-OT): VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Habib Oil Mills (Pvt.) Limited (HOML) at ‘BBB/A-3’ (Triple B/A-Three). The medium to long-term rating of ‘BBB’ denotes adequate credit quality coupled with reasonable protection factors. Moreover, risk factors are considered variable if changes occur in the economy. The short-term rating of ‘A-3’ denotes timely payment of obligations coupled with satisfactory company fundamental and liquidity factors. Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. Previous rating action was announced on December 21, 2020.
The ratings assigned to HOML take into account high business risk profile of local edible oil industry characterized by highly competitive intensity due to fragmentation and low barriers of entry resulting in limited pricing power and thin profitability margins. The operating dynamics of the industry further include mitigation of foreign exchange and price volatility risks in imported raw material procurement. The assigned ratings also incorporate established track record of sponsors in the edible oil business, market position, significant brand recognition and favourable demand prospects for edible oil in the domestic market.
Assessment of financial risk profile incorporates price driven increase in topline, slashed margins, weak profitability and liquidity indicators coupled with leveraged capital structure. The margins declined sizably during the outgoing year owing to time lag in transferring incremental cost to end consumers. In addition, the ratings remain sensitive to HOML’s nominal net margins on account of significant promotional expenses; the same remains an integral part of company’s presence in fast moving consumer goods sector.
Overall liquidity profile remains constrained due to limited funds generated from operations and extended working capital cycle which requires utilization of short-term borrowing. Revision in outlook takes into account constraint debt service coverage remaining below 1x, with the same expected to remain stressed going forward in view of global economic uncertainty impacting commodity prices and inflationary pressures increasing working capital requirements. Profitability metrics and cash coverages will remain under pressure as a result.
The company is currently undertaking capital expenditure for back process integration through commencement of seed crushing and solvent extraction plant in 4QFY22; the same would result in both increased nameplate capacity and improved operational efficiencies through cost rationalization. Moreover, management projects change in regulatory risk scenario with reduction in income tax on edible oil industry along with tax credit provision applicable on the company for set-up of new production facility to support liquidity going forward. Ratings will remain dependent upon achievement of projected plans, improvement in margins and cash flow coverages and maintenance of capitalization indicators, going forward.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/