Press Release

VIS Reaffirms Instrument Rating of Sukuk 2 Issue of OBS Pakistan (Private) Limited

Karachi, November 05, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the instrument rating of ‘Sukuk 2’ issue of OBS Pakistan (Private) Limited (‘OBS Pakistan’ 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 February 28, 2024. The entity rating of OBS Pakistan is ‘A/A2’ (‘Single A/A Two’) with a ‘Stable’ outlook.

OBS Pakistan was incorporated on December 07, 2021, as a private limited company and is a subsidiary of AGP Limited, which holds a 91.82% ownership stake. The Company’s primary activities encompass the import, marketing, export, dealership, distribution, and wholesale of pharmaceutical products. The operations commenced in 2023 following the acquisition of 17 pharmaceutical brands from Viatris Inc. and Pfizer Pakistan, with 10 brands actively marketed—3 of which are locally manufactured and 7 imported. The acquisition was financed through 73% debt and 27% equity, with the debt portion raised through two sukuks of Rs. 3.6 bn and Rs. 2.9 bn respectively.

The Sukuk, issued in February 2024, amounts to Rs. 2.9 bn and features a 7-year tenor with an 18-month grace period. It carries a profit rate of 3M KIBOR plus a 1.60% spread, with principal payments scheduled over 22 quarters. Profit payments are made quarterly and on time, with the most recent payment completed in August 2024. The security structure includes a mortgage/hypothecation charge on AGP's fixed assets, a corporate guarantee from AGP, and a designated collection account for revenue receipts. The Financing Payment Account (FPA) will be replenished two working days prior to each installment due date.

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 factor in the strong sponsor support from AGP Limited, which includes a corporate guarantee securing the Company’s debt. Additionally, the Company’s shift in distribution is expected to enable wider market reach and enhance operational efficiency through connections with a broader network of pharmacies, including retail chemists, institutional sales, and e-commerce channels. However, portfolio concentration risk persists, and mitigating this overtime will remain important from ratings perspective.

The assigned ratings also take into account the Company’s financial risk profile. OBS Pakistan reported favorable topline performance in the current year, driven by a significant uptick in sales volumes and a one-off price adjustment approved by the government. With product supply secured from Pfizer Pakistan during the ongoing transition period, the risk of cost variability has been addressed through pre-negotiated product costs. Subsequently, the Company reported stable gross margins during the review period. Going forward, the rating is underpinned by expected supply chain efficiencies and improvement in the Company’s profitability profile in the medium term, supported by plans to manufacture the majority of imported active brands at AGP's facilities. However, cash flow coverages were under stress due to constrained profitability in the ongoing year, and management anticipates the liquidity profile to remain under strain on account of increased current liabilities arising from the debt-financed acquisition. Nevertheless, comfort is drawn from working capital support pledged by the parent company. The capitalization profile was impacted due to acquisition financing, with both gearing and leverage ratios increasing over the rating horizon. The rating remains sensitive to the gradual strengthening of the equity base, reduction in debt levels, and the maintenance of effective liquidity management.

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 .