Press Release

JCR-VIS Assigns Initial Ratings to Khalis Oil and Ghee Industries Limited

Karachi, September 28, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘BBB+/A-2’ (Triple B-Plus /A-Two) to Khalis Oil and Ghee Industries Limited (KOGIL). 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-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Outlook on the assigned ratings is ‘Stable’.

KOGIL is an edible oil refining unit. The company is a part of Khalis Group which owns business stake in various sectors. The assigned ratings take into account relatively high business risk profile, which is mitigated to a certain extent by relevant experience of the sponsors led management and cost advantage in supply chain emanating from group synergies. The ratings also take into account moderate financial risk profile as reflected by increasing though vulnerable profit margins, moderate gearing indicators, and sufficient liquidity. The ratings are constrained by low brand recognition, high competition in the branded edible oil segment, under-utilized production capacity, and relatively weak corporate governance framework.

KOGIL is positioning itself to capitalize on favorable demand dynamics of Pakistan’s edible oils industry. The company, however, is a relatively new entrant and hence faces higher competition from well-established brands which have extensive distribution network. Due to its low brand recognition, KOGIL is more prone to pricing pressure created by cheaper varieties of imported edible oils and unorganized sector which has notable penetration in the industry. The company also faces challenges in marketing since there are little product differentiation and limited value addition. Although, the industry regularly passes on the impact of any increase in imported raw material prices, a sustained increase in prices could dampen the overall profitability in the wake of KOGIL’s open market procurement strategy.

KOGIL exhibited considerable growth in net sales during FY18 on account of a sizeable increase in production output and a notable improvement in the average selling prices. This coupled with procurement of raw material at marginally cheaper rates resulted in higher profit margins. Consequently, the company registered higher net income, which also includes a favorable impact of tax exemption. Going forward, net sales are expected to improve as KOGIL has room to increase production levels.

Core equity of KOGIL, albeit modest, expanded with the accumulation of undistributed profits during FY18. The debt profile of the company only comprises short-term credit facilities which have been availed to finance the working capital requirements. During FY18, the outstanding balance of short-term borrowings increased on account of accelerate production activity. Resultantly, gearing and debt leverage indicators stood slightly higher. As per the financial projections, the gearing indicators are expected to improve going forward as the equity is augmented on the back of profit retention and stable borrowing levels. The ratings will remain be dependent on the company’s ability to maintain gearing within manageable levels.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.

Javed Callea
Advisor

Applicable rating criterion: Industrial Corporate (May, 2016)
http://jcrvis.com.pk/docs/Corporate-Methodology-201605.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2018 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .