Press Release

VIS Reaffirms Instrument Rating of Sukuk 1 Issue of OBS AGP (Private) Limited

Karachi, October 31, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the instrument rating of ‘Sukuk 1’ issue of OBS AGP (Private) Limited (‘OBS AGP’ or the ‘Company’) at ‘A+’ (‘Single A Plus’). Long term rating of ‘A+’ indicates good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Outlook on the assigned ratings remains ‘Stable.’ Previous rating action was announced on August 25, 2023. The entity rating of OBS AGP is ‘A/A1’ (‘Single A/A-One’) with a ‘Stable’ outlook.

OBS AGP was incorporated on November 12, 2020, as a private limited company and operates as a subsidiary of AGP Limited, which holds a 65% ownership stake. The Company’s principal activities include the import, marketing, export, dealership, distribution, wholesale, trading, and manufacturing of pharmaceutical products. In July 2021, OBS AGP acquired 22 pharmaceutical products from Sandoz AG, and since then, 9 new brands have been added to its portfolio.

The Sukuk, issued in October 2021, amounts to Rs. 2.6 bn with a 5-year tenor and a 1-year grace period, featuring a profit rate of 3M KIBOR plus a 1.55% spread. Principal payments are scheduled over 16 quarters, commencing 15 months from the issue date, with quarterly profit payments. The most recent payment, including both profit and principal, was completed in October 2024. The security structure includes a pari-passu charge on AGP’s fixed assets valued at PKR 2.6 bn (inclusive of a 20% margin), a share pledge by AGP’s major shareholder amounting to PKR 1.4 bn (inclusive of a 53.57% margin), and a corporate guarantee from AGP covering the full principal amount. Additionally, a rental payment reserve account will maintain one upcoming rental payment at all times.

The assigned ratings reflect the low business risk profile of Pakistan's pharmaceutical sector, marked by stable demand and low economic sensitivity, which supports steady revenue and profitability. Key factors such as population growth, disease prevalence, emerging illnesses, and hygiene conditions sustain the demand for pharmaceutical products. Profitability, however, remains under pressure due to price caps on essential drugs, enforced by the Drug Regulatory Authority of Pakistan (DRAP). Additionally, 70-80% of raw materials are imported, exposing companies to exchange rate risks. Nevertheless, the recent deregulation of drug prices for Non-Essential Medicines allows companies to independently raise prices, further supporting the sector's business risk profile.

The ratings incorporate the sponsor’s established market position and the resulting financial support available to OBS AGP, which includes a corporate guarantee securing the Company’s debt. While portfolio concentration risk persists, the management is actively introducing new products and enhancing marketing efforts across a broader range of brands and therapeutic categories to mitigate the risk.

The assigned ratings also take into account the Company’s financial risk profile. OBS AGP reported favorable topline performance in CY23, alongside improvement in gross margin following a one-off government price increase for essential and non-essential medicines. However, in the ongoing year, despite experiencing revenue growth, margins were subdued due to inflationary impact. This, coupled with high finance charges, cascaded to a constrained bottom line. The Company’s liquidity profile remains under pressure primarily due to increased current liabilities arising from debt-financed acquisitions, with the newly acquired business yet to generate sufficient cash flow to offset the increased liabilities. This situation may continue until the acquisition is fully integrated and operational synergies are realized. Although cash flow coverages remain stressed, the availability of unutilized working capital lines and support from the parent company provide comfort. While, long-term debt repayments have strengthened capitalization indicators, further equity expansion, supported by profit retention, will be important for maintaining balance sheet strength.

For further information on this ratings announcement, please contact at 021-35311861-64 or email at info@vis.com.pk.

Applicable Rating Criteria: Corporates:
https://docs.vis.com.pk/docs/CorporateMethodology.pdf
Applicable Rating Criteria: Rating the Issue
https://docs.vis.com.pk/docs/Rating-the-Issue-Aug-2023.pdf
VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.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 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .