The Pakistan Credit Rating Agency Limited
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Muhammad Zain Ayaz

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PACRA Maintains Entity Ratings of Engro Fertilizers Limited

Rating Type Entity
(27-Jul-23 )
(29-Jul-22 )
Action Maintain Maintain
Long Term AA AA
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

Pakistan's predominantly agrarian economy primarily relies on local fertilizer production, satisfying approximately 88% of its needs, with the remaining portion imported. The Country's total fertilizer production capacity stands at around ~ 7.1mln MT of Urea and CAN and ~ 1.7mln MT of DAP, NP, and NPK. In CY22, Urea’s offtake stood at ~6.6mln MT and DAP’s offtake stood at 1.1mln MT. Whereas in 3MCY23, Urea offtake stood at ~ 1.6mln MT posting a stable trend. Similarly, DAP offtake stood at 0.2mln MT. Considering the overall urea demand and supply situation and LNG unavailability for the plants, ~0.26mln MT of urea was imported during CY22. Overall margins of the industry remained healthy and going forward industry’s outlook is expected to remain satisfactory. International market prices fell at the start of quarter due to lower demand and sellers sought to offload barges in crowded markets due to force liquidity. Despite low demand, prices didn’t correct to expected levels due to changing geopolitical situation internationally.
The rating reflects Engro Fertilizers Limited's sound risk profile. EFert derives strength from its parent company i.e., Engro Corporation Limited which is the largest conglomerate in Pakistan. The Company's capacity utilization of both Urea and NPK remained strong, primarily attributable to continued gas supply and improved plant efficiencies. The Company can reap benefits of stable gas supply from the Pressure Enhancement Facility installed in Mari Petroleum Daharki, once its operations start. The company can also benefit from the Green Pakistan Initiative, by the government of Pakistan, in the shape of subsidies. EFert continues to increase its topline backed by volumetric growth. The Company has also diversified its product portfolio into other agri-based products and has maintained healthy growth trajectory. At period end CY22, the gross margin of the Company dropped to ~27.3% (CY21: ~39.2%) and net profit margin to ~10.2% (CY21: ~23.3%), due to high raw material costs. A moderately leveraged capital structure (CY22: ~32.3% | 3MCY23: ~22.3%) with moderate coverages and significant liquidity leads to a robust financial profile. Ratings draw comfort from sponsors' business acumen and their widespread reach. A strong governance and management framework add strength to the Company's profile.
The ratings are dependent on the sustainability of operations and maintaining its market share. Sustainability in the strong ownership, stable dividends, and effective management of financial profile is important. Prudent management of the working capital, cash flows, and coverages are imperative for the ratings.

About the Entity
Engro Fertilizers Limited was incorporated in 2010 as public unlisted company, post demerger from parent company Engro Chemicals Pakistan Limited effective Jan 10. EFert is majorly owned by Engro Corporation Ltd. (Engro Corp) (~56%), the largest conglomerate in Pakistan. The rest of the ownership lies with the general public (~24%), financial institutions (~3%), mutual funds (~3%), insurance companies (~2%), and others (~12%). EFert is engaged in the manufacturing, purchasing, and marketing of fertilizers, seeds, and pesticides and providing agri-services. The Company has three plants: two Urea plants located at Daharki (Base plant and EnVen) and one NPK plant located at Port Qasim, Karachi. The total designed capacity of EFert’s Urea plants is 2.275mln MT, while NPK plant has a total capacity of 100,000MT. The capacity utilization level of the company stood at ~100% in CY22. The company's board of directors is chaired by Mr. Ghias Khan, who is also the CEO of Engro Corp, and Mr. Ahsan Zafar Syed, the CEO of Engro Fertilizers Limited.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.