PACRA Assigns Initial Entity Ratings to STS Oil Mills (Pvt.) Limited
Pakistan's edible oil industry is heavily reliant on imports since oilseeds account for ~80% of the cost of production. Edible oil is the country’s 2nd largest import after petroleum. Pakistan’s total oil and fats consumption is ~ 5 million metric tons per annum and its per capita consumption is ~22 kg. Consumption is met by 70% (~3.3 MMT) of edible oil import. The remaining 30% (~1.7 MMT) of edible oil is produced from oilseeds (local ~ 3.5MMT, imported ~ 3.1 MMT). Additionally, low domestic oilseed production in Pakistan caused by a distortion in support price mechanism and lower yields have pushed farmers away from oilseed, further increasing dependence on imports. On the supply side, the key raw materials – oilseed and RBD palm oil – are imported primarily from USA, Brazil, and Malaysia. Moreover, raw material prices have continued to inflate amid supply uncertainties and historically low global inventory levels, along with rupee devaluation impacting importers. Subsequently, prices of cooking oil and vegetable ghee have remained on the higher side. Going forward, sales are expected to remain stable. Margins and profitability are expected to improve for players and costs will be offset by the increased demand and in turn prices.
The rating reflects STS Oil Mills (Pvt.) Limited’s (‘STS Oils’ or ‘the Company’) developing position in edible oil segment. STS Oils is primarily engaged in the process of hydrogenation of crude palm oil; producing and selling vegetable ghee. Over the years, capacity utilization remains low, however, is expected to increase being a staple food item. Moreover, the Company has tapped in the export market. However, the share of exports remain small. With a relatively small market share, the Company has experienced dwindling top-line owing to reduced demand for banaspati ghee, in local and export market, post covid-19 outbreak. Margins also showcased a variation over the years. Inventory management system and related efficiencies would require the Company’s attention to keep its working capital costs low. Being an importer of palm oil, the Company remains exposed to the inherent risk related to currency fluctuations and prices of raw material. Being an exporter, though in small quantum, the Company's debt book majorly comprises Export Refinancing Facility availed to fund its working capital needs. The debt cover remains strong. However, the Company's financial risk profile remains considerably high.
The ratings are dependent on the management's ability to prudently improve margins, profitability and financial profile of the Company. Meanwhile, strengthening of governance practices will have a positive impact on the ratings. Any deterioration in debt coverages leading to higher financial risk or substantial losses will have a negative impact on ratings.
STS Oil Mills (Pvt.) Limited, was incorporated in Sept-15 as a private limited company. The Company is primarily engaged in the process of hydrogenation of crude palm oil; producing and selling vegetable ghee. The raw material (Palm Oil) is primarily imported from Malaysia and Indonesia. At present, STS Oils has a crushing capacity of 200 MT per day.
STS Oils major shareholding resides with Mr. Sohail Shamshad and his wife Ms. Afia Sohail, holding an equal share of ~32.5%. The remaining share (~35%) resides with Mr. Sohail’s son, Mr. Asfandyar Sohail. The BoD comprises one executive and two non-executive directors from the sponsoring family. The Board’s Chairman and the Company's CEO, Mr. Sohail, plays a pivotal role in making strategic decisions.