PACRA maintains entity ratings of Engro Fertilizers

July 27, 2023 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has maintained entity ratings of Engro Fertilizers Limited (PSX: EFERT) at "AA" for long term and "Al+" for short term with a stable outlook forecast, latest press release issued by PACRA showed.

Pakistan's predominantly agrarian economy primarily relies on local fertilizer production, satisfying approximately 88% of its needs, with the remaining portion imported.

The country's total fertilizer production capacity stands at around 7.1m Metric Tons (MT) of Urea and CAN and 1.7m MT of DAP, NP, and NPK.

In CY22, Urea’s offtake stood at 6.6m MT and DAP’s offtake stood at 1.1m MT.  Whereas in 3MCY23, Urea offtake stood at 1.6m MT posting a stable trend.

Similarly, DAP offtake stood at 0.2m MT. Considering the overall urea demand and supply situation and LNG unavailability for the plants, 0.26m MT of urea was imported during CY22.

Overall margins of the industry remained healthy and going forward industry’s outlook is expected to remain satisfactory.

International market prices fell at the start of the quarter due to lower demand and sellers sought to offload barges in crowded markets due to force liquidity.

Despite low demand, prices didn’t correct to expected levels due to changing geopolitical situation internationally.

EFERT derives strength from its parent company i.e., Engro Corporation Limited which is the largest conglomerate in Pakistan.

The company's capacity utilization of both Urea and NPK remained strong, primarily attributable to continued gas supply and improved plant efficiencies.

EFERT can also benefit from the Green Pakistan Initiative, by the government of Pakistan, in the shape of subsidies.

It continues to increase its topline backed by volumetric growth and has also diversified its product portfolio into other agri-based products and has maintained a healthy growth trajectory.

At period end CY22, the gross margin of the Company dropped to 27.3% (CY21: 39.2%) and net profit margin to 10.2% (CY21: 23.3%), due to high raw material costs.

A moderately leveraged capital structure (CY22: 32.3% | 3MCY23: 22.3%) with moderate coverages and significant liquidity leads to a robust financial profile.

Ratings draw comfort from sponsors' business acumen and their widespread reach.

The ratings are dependent on the sustainability of operations and maintaining its market share.

Sustainability in strong ownership, stable dividends, and effective management of the financial profile is important.

Prudent management of the working capital, cash flows, and coverages are imperative for the ratings.

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