PACRA Assigns Initial Rating to Guard Agricultural Research and Services (Pvt.) Limited

Rice is among the five major crops of Pakistan and is the second main staple food, after wheat. The segment contributes about 3.5% in agriculture value addition and 0.7% to GDP. Local consumption includes ~95% of basmati rice and ~5% non-basmati. During FY23, rice crop area decreased to ~3.2mln Hec (FY22: ~3.4mln Hec), reflecting a decrease of ~6%. Rice production decreased by ~17%, standing at ~7.4mln MT in FY23 (FY22: ~8.9mln MT). Floods during Aug-22 razed rice crops causing an average crop loss of ~20-25%. Around ~4mln MT of rice is consumed locally, while, the remaining is exported. During FY23, Pakistan exports decreased to ~USD 2.1bln (FY22: ~USD 2.5bln). Thus, impacting the industry’s overall topline. However, rupee depreciation provided some cushion to the export player. Industry's overall margins and cashflows may become stretched. Shrinking arable land and a growing population have reduced per capita land availability, potentially straining food supply due to poor crop productivity. Whereas, hybridization in corn, paddy, and vegetables is gaining traction, expected to fuel sector growth.
The ratings reflect Guard Agricultural Research & Services (Pvt.) Limited’s (‘the Company’) growing business profile in the Agriculture & Food industry. The packed basmati is sold locally as well as exported under the Company’s brand name to 45 countries in Asia, Middle East, North America, Africa, Europe & Australia. The Company has forged long-term contracts with a Chinese partner to farm 200,000 acres for chili cultivation. Together, they'll work on improving chili seed breeding, boosting crop production, and researching high-quality chili seeds. The Company has an increasing top-line and posted healthy margins. However, it's worth mentioning that both of these factors are relatively modest in comparison to industry peers. The Company’s working capital management considered adequate as net working capital for FY23 came out to be 84 days (FY22: 66 days) due to cautious debtor & creditor management, the slight drop in comparison with the corresponding period is due to high inventories stocks due to cyclicity of business nature. The capital structure is strong as the leverage came out to be ~20%, for FY23 (FY22: ~21%). The interest coverage for FY23 remained good as the Company generates sufficient free cash flows to ensure the timely repayment of short-term borrowings and cover interest costs. The Company exclusively relies on short-term borrowing to manage its working capital needs, as it possesses adequate equity for financing long-term projects.
The ratings are dependent upon brand reputation through customer satisfaction, which subsequently yields amplified business expansion. Adherence to sound financial discipline while strengthening debt servicing capacity through improved cash position is vital for the ratings. Positive outcome of future projects and sustainability of profits remains imperative for the sustenance of ratings.

About the Entity
The Company is part of the Guard Group, started in 1948 with strong foothold in filters & lubricants industry, and was incorporated in 1989. The Company has bifurcated its operations into two divisions: Agriculture and Food. Agriculture division include trading of imported hybrid & local hybrid seeds under the brand name of ‘Guard’ & imported agricultural machinery. While, the Food division include processing of basmati rice and trading of pasta & salt under brand name of ‘Guard’. The Company’s major ownership resides with brothers Mr. Iftikhar Ali Malik (24.24%), Mr. Shahbaz Ali Malik (24.24%), Mr. Waqas Ali Malik (11.64%), Mr. Shahzad Ali Malik (27.25%), and Mr. Hamza Waqar Malik (12.60%).