PACRA Maintains Entity Ratings of National Refinery Limited

The rating incorporates NRL’s association with only integrated oil group – Attock Group (AG). Key character of AG is a low leveraged capital structure with sound cash flow generation ability; ably replicated to NRL too. The company predominantly financed its upgradation projects, including desulphurization unit and ISOM, through internally generated funds; capitalized in Jun’17 and Oct’17, respectively. This translated into accelerated growth in topline FY18. In spite oil prices have been increasing, GRMs remains in comfortable range all through FY18. Higher operation cost, including depreciation, from new units, dented the gross profit. Exchange loss amounting to ~PKR 1.7bln due to the significant devaluation of Pakistani rupee against US dollar further impacted the profitability. Additionally, management is pushing the government for an upward revision of deemed duty (from 7.5% to 9%) to address the issue; actual outcome remains to be seen. Nevertheless, the size of the free cash flows from operations (FCFO) remains in a comfortable zone on annual basis. During FY18, healthy coverages and low leveraged capital structure improve the financial risk profile of the company.

The ratings are dependent upon the sustained market position of the company, herein continuous growth in revenue is important. Prudent management of financial matrix while keeping optimal capital structure would remain critical. A prolonged downturn in gross profit thereby translating in significantly lower cash flows would impact the ratings.

About the Entity
National Refinery Limited (NRL) is listed on the Pakistan Stock Exchange. NRL is engaged in the manufacturing, production, and sale of a large range of petroleum products. The refinery complex of the Company comprises three refineries, consisting of two lube refineries and one fuel refinery.

With a refining capacity of ~2.8mln tpa, NRL, the third largest refinery in the country was incorporated in 1963 and privatized in 2005. Attock Group (AG) through its group companies retains the majority stakes of (~51%) in NRL. Other major shareholders include; Islamic Development Bank (~15%), Public sector companies (~6.18%) and NIT & ICP (~2.98%).
Attock Group (AG), is a fully integrated group covering all segments of oil and gas industry from exploration, production and refining to marketing of a wide range of petroleum products besides also engaged in manufacturing and trading of cement, information technology, etc.
The company’s seven-member board of directors includes five representatives of the AG - including two members of the Pharaon family. The remaining two members are independent directors including one nominee representing IDB.
Mr. Shuaib A. Malik, recently appointed as a chairman of the board after serving several years as deputy chairman & chief executive officer. He has been associated with the company for ~35 years, is a veteran of the oil business. A fair number of board members have related experience, which is positive. The CEO, Mr. Jamil A. Khan, has been associated with the company since 2005, served as deputy managing director since 2009. He has been elevated as the chief executive officer effective November 03, 2018. He is also serving on the board of director of ARL since January 2017. He is supported by an experienced management team that has extensive experience in the refinery sector.