PACRA Maintains Entity Ratings of Shujabad Agro Industries (Pvt.) Limited, Assigns 'Positive' Outlook

Pakistan's edible oil industry is heavily reliant on imports since key imported raw materials account for ~80% of the cost of production. Additionally, low domestic oil seed production caused by a distortion in support price mechanism and lower yields have pushed farmers away from oil seed, further increasing dependence on imports. Amidst the COVID-19 outbreak, demand has been impacted due to closure of restaurants and banquet halls. However, being a staple food item, demand from household is not likely to drop. Meanwhile, sale and recovery of soy meal has been affected due to unfavorable circumstances of poultry and feed sector. On the supply side, the key raw materials – oil seed and RBD palm oil – are imported primarily from the USA, Brazil and Malaysia. Industry players have sufficient inventories to fulfill demand. International prices of soybean oil seed have dropped (~5%) slightly. Palm oil prices saw steeper decline (~20%), while the rupee has depreciated around 9% since Jan-20. Sales may remain under pressure due to prolonged closure of banquets and restaurants. However, branded and packaged oil segment is expected to remain competitive but margins and profitability may reduce for players in soybean oil refining segment. However, players refining crude palm oil and making ghee may benefit from lower prices once existing inventory is diluted. Interest rate cut and SBP initiatives like restructuring/deferment of loans will provide some respite in the short-time.
The ratings reflect Shujabad Agro Industries (Pvt.) Limited's developing brand equity for its premium (Eva Oil) and middle tier (Maan Ghee) brands. The Company posted higher revenues as it increased its volumetric output despite relatively subdued demand from meal segment amidst COVID-19. The Company managed to improve its margins and profitability as it passed on the higher costs to customers. Refined and branded edible oil segment remain competitive where volumes and margins are function of timeliness and prudence of raw materials procurement. The Company follows a cautious approach for its procurement and avoids inventory pile up. The demand may remain subdued amidst prevailing conditions in the short-term. The Company has a leveraged capital structure supplemented by strong coverages. The coverages improved despite higher interest rates as overall quantum of borrowings reduced and the Company generated higher cashflows. The recent cut in interest rate is expected to further improve the coverages. The Company improved its working capital cycle despite higher receivables with strong cushion for borrowings at the trade level.
The ratings are dependent on the management's ability to maintain its growing business volumes, while sustaining margins and profitability. Prudent management of working capital and maintaining strong coverages is critical. Effective changes in governance framework would be beneficial for the ratings.

About the Entity
Shujabad Ago Industries (Pvt.) Limited is incorporated as a private limited company in Pakistan, since Feb 2000. The Company is primarily engaged in edible oilseed crushing/solvent extraction, refining, oil and ghee manufacturing and its packaging. It also sells soy meal in local and export markets. The Company is competing in premium edible oil segment with ‘Eva’ and middle tier edible oil segment with ‘Maan’. It manufactures two different products (refined edible oil and meal) in four variants (cottonseed, sunflower, soybean and canola). The combined seed crushing capacity of the Company's three solvent extraction units is 213,000 MT per annum. The Company’s edible oil refinery has an installed capacity of 69,000 MT per annum and ghee manufacturing plant has an installed capacity of 10,800 MT per annum. Pouch making and filling plants have an installed capacity of making 43,200 pouches per day and filling 138,000 pouches per day, respectively. Around 7,000 PET bottles of 3-5 litre edible oil are filled per day.

Shujabad Agro is owned by two families. The majority shareholding (60%) lies with the family members of Mr. Shakil Ashfaq, of which Mrs. Ambreen Shakil holds 45% shares. The remaining 40% of the shareholding resides with Mr. Abdul Wahid.