NRL's credit ratings downgraded by PACRA, outlook revised to stable

May 27, 2024 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has downgraded the entry ratings of National Refinery Limited (PSX: NRL) to "AA" for long term and "A1" for short term with a stable outlook forecast, based on latest press release issued by PACRA.

The previous long-term rating was "AA+", while the short-term rating was "A1+", both with a negative outlook, as announced by PACRA on May 26, 2023.

The ratings reflect NRL’s stressed profitability owing to decline in product margins followed by challenges emanating from global drop in crude oil prices and reduced sales due to lower demand/smuggled products, causing the Company to incur inventory losses.

NRL's core business remains exposed to the vicissitudes in international crude and petroleum products’ (POL) prices, which in turn, steer the gross refining margins (GRMs) of the company.

Furthermore, the consumption of refined products has declined in the local market resulting in lower offtake which has hampered the throughput of the refinery.

Although there was a slight recovery in product margins during the third quarter but as a result of escalating operating cost particularly driven by high utility tariffs resulted in cumulative gross loss of Rs3.168 billion during the nine-month period ended March 2024.

Moreover, the company’s reliance on short term Borrowings has increased over the period to manage its working capital cycle.

As a result, higher finance cost further impacted the company’s performance resulting in Net loss of Rs7.523bn during the period.

With declining furnace oil consumption by the power sector and lower offtake of HSD due to infiltration of smuggled products in the economy, the operational utilization of the refinery remained low.

Lube segment also reported lower profitability of Rs292m during 9MFY24 (9MFY23: 3.553bn) as a result of turnaround during the second quarter leading to lower sale volumes.

Going forward, the demand for Lube is expected to pick up and the management is of view that this will have a positive impact on the result of the lube segment.

The government has finalized the Refinery Policy for upgradation of existing refineries (as amended in Feb'24).

The upgrade agreements will be finalized and signed by the refineries in the coming months which would provide fiscal incentives.

Going forward, the upgradation plans will further increase the Company’s leveraging currently standing at 60.7%.

The assigned ratings reflect the strategic importance of NRL to the economy which is also evident from the presence of Attock group having proven history of operating in the sector.

Furthermore, the rating takes comforts from the fact that the refinery policy will provide support for the upgrade of the fuel refinery which would in turn contribute towards sustainability of the operations.

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