VIS upgrades ratings of FBBL as topline and gross margin improve

March 19, 2021: VIS Credit Rating Company Limited (VIS) has upgraded the entity rating of Fauji Fertilizer Bin Qasim Limited (FFBL) from ‘A+/A-1’ (Single A Plus/ A-One) to ‘AA-/A-1’ (Double A Minus/ A-One).

Long term rating of ‘AA-’ signifies high credit quality and strong protection factors. Risk is moderate but may vary slightly from time to time because of economic conditions.

Short term rating of ‘A-1’ denotes high certainty of timely payment, excellent liquidity factors supported by good fundamental protection factors. Risk factors are minor. Outlook on the assigned ratings is ‘Stable’. The last rating action was announced on August 27, 2019

The rating assigned to FFBL takes into account profile of major sponsor, i.e. Fauji Fertilizer Company and Fauji Foundation, which is a diversified conglomerate with strategic stakes in a wide variety of sectors including fertilizer, cement, food, power generation, gas exploration, LPG marketing and distribution, financial services, and security services. Furthermore the rating also incorporates FFBL’s revenue base diversification. Over the past 3-year period, other revenues from subsidiaries/associates, recorded as ‘other income’, comprised an average of a third of the revenue base (gross profit + other income).

In 2020, the company did well in recuperating the topline and the gross margin, which had undergone significant contraction in the preceding year. As a result of which, the financial risk indicators, which had come under stress in 2019, have posted improvement. Furthermore, the bottom line has also benefited from the lower benchmark rates prevailing during the period, translating in a lower cost of debt.

The improvement noted in the topline & gross margin and future projections have been factored into the upgrade. Even though cash flow coverage indicators during the rating horizon, including FFO to (net) Debt and DSCR, remain slightly below the threshold for the assigned rating band, the availability of a sizable liquidity buffer has been taken into consideration. Over the long term, cash flow coverage indicators are projected to become aligned with the benchmark. VIS will track the same going forward, and a drop in the same may create pressure on the rating opinion.

Headquartered in Islamabad, Pakistan, FFBL is the sole domestic producer of Di-Ammonium Phosphate (DAP) fertilizer. It is also the only producer of granular form UREA (in contrast to the widely marketed ‘prilled’ variant). FFBL enjoys leadership in DAP fertilizers with a market share of 41% in 2020 and is Pakistan’s 4th largest producer of UREA. Fauji Foundation (FF) and its subsidiary Fauji Fertilizer Company Limited (FFC) hold a majority shareholding in FFBL. Both FFC and FFBL market their products under one umbrella brand ‘Sona’, which has wide recognition among the farmers’ community.

VIS