PACRA Upgrades Entity Ratings of AGP Limited; Maintains Sukuk Ratings

The ratings reflect AGP's strong business fundamentals. The pharmaceutical industry has witnessed a high rate of sustained growth over the years. Cost-efficiencies as well as demand inelasticity are benefiting the industry players. While product pricing has been a challenge, the new CPI-linked pricing criteria has allowed an increase in prices with respect to inflation, indicating a positive sign. At the same time, AGP's core profitability is strong; any downward revision in margins must remain range-bound. Cash flows - strong and sizeable - are adequate to service the debt initially procured by the incumbent sponsors – OBS Group – to acquire the company in 2014. With the recent debt re-profiling, debt servicing ability has improved further. Ongoing process of listing, through offer for sale by central sponsors would bode well from governance and transparency perspective. Expansion strategies and strategic alliance with Mylan, USA to promote their product portfolio in Pakistan should enable volumetric growth. Presence of OBS Group in the pharmaceutical sector provides strength, in the form of group synergies, to AGP's positioning within the industry.
The ratings are dependent on continued sustainability of profits and market share. Adequacy of cash flows and availability of alternative resources to make debt-related payment remains important. Meanwhile, compliance with internally-defined leveraging metrics is a prerequisite. Moreover, the instrument rating is dependent upon upholding of all major covenants.

About the Entity
AGP Limited (AGP) is an unlisted public pharmaceutical company; the operations of entity have been in Pakistan since 1989. It is majority owned by OBS Group (OBS) (57.9%), followed by strategic partners: Muller & Phipps (M&P), Baltoro Growth Fund (BGF), Bank Alfalah, High Q Pharmaceuticals and JS Bank. OBS Group - ranked 9th in the local pharma industry, deals in clinical research, manufacturing, marketing, sales and distribution of pharmaceutical & healthcare products.
The seven-member BoD comprises four representatives of OBS Group, and one each of M&P and BGF, with a recent induction of one independent director. The board comprises experienced professionals from pharmaceutical and financial backgrounds. The Chairman, Mr. Tariq Moinuddin, is the brains behind OBS Group. Mr. Moinuddin, CPA from Canada, carries over three decades of domestic and international professional experience. The MD & CEO, Ms. Nusrat Munshi, has close to 26 years of experience, around a decade of which is in the pharmaceutical industry. She is supported by an experienced core management team.

About the Instrument
AGP has issued (Jun’17) a privately placed and secured Sukuk of ~PKR 2.4bln in order to reprofile its long term debt. With a tenor of 5 years, the Sukuk’s principal and profit (3MK+1.3%) will be paid in 20 equal quarterly installments, starting from the 3rd month of issue date (Sep’17). As of Sept-17, an amount of PKR 2.28bln is outstanding.
The instrument, initially, is secured through first pari passu charges over all present and future non-current assets (~PKR 3.1bln) of AGP and Aspin Pharma (associate). AGP’s management is committed to maintain sufficient liquidity for the instrument.