Muhammad Zain Ayaz
PACRA Maintains Entity Ratings of Islamabad Farms
The poultry industry is one of the largest agro-based segments in Pakistan, comprising domestic & commercial poultry. The industry has posted annual growth of ~8%. Pakistan is sufficient in poultry meat and egg production. However, per capita protein consumption remains low (11th) when compared to the world's average. The industry generates an estimated annual revenue of ~PKR 1,981bln from local and export sales during FY23, a YoY increase of ~29%. Export revenue is ~USD 375bln, annually. The increase is majorly price driven. Subsequently, prices of poultry products, especially day-old chicks, witnessed a hike of ~ 13% and benefited the players involved in the poultry allied chain. Increasing demand, and hence, prices eased down the liquidity problems of the industry. Demand for poultry products is likely to stay favorable for the industry players. However, since the output of the Sector is an essential food item, the demand of the poultry sector largely remains unaffected (price inelastic) to a great extent despite price increases. The poultry sector will continue to remain under pressure in terms of high import costs and restrictions on the import of GMO soybean which is the main import in poultry feed. Currently, this is a key risk exposed to the supply chain of the sector, which is also putting poultry businesses, especially the small firms, at a high risk. Additionally, high inflation and devaluation of Pakistani rupee remain an impediment to the sector’s overall performance.
The ratings reflect Islamabad Farms's ('the Business') developing position in the poultry industry and the sponsor's adequate acumen across the integrated poultry supply chain. The Business revenue is concentrated toward day-old chicks and posted a volumetric decline during FY23. Consequently, profitability also showed a declining trend. However, procuring feed in bulk from the Group’s own company and increasing poultry product prices benefited the margins. The increased operational costs resulted in decreased net profit, which came out to be PKR 49mln, for 9MFY23 (9MFY22: PKR 63mln), consequently, the Business's net margin remained 1.8% (9MFY22: 2.5%). Islamabad Farms remains exposed to price volatility and contingent health risk associated with its product. Demand for poultry products remains stable. This along with a surge in day-old chicks prices is expected to benefit the Business. The financial risk profile of Islamabad Farms is characterized by a strong leveraging ratio and remained stable at 32.1% (9MFY22: 32.1%) and adequate coverage ratios of 4.1x. Loan mix is skewed towards short-term borrowings of PKR 49mln to fulfill the working capital requirements. Moreover, the ratings incorporate potential support from sponsors and the Group.
The ratings are dependent on the management's ability to sustain its operations. Improving margins, in turn building profitable volumes remain critical for the ratings. Effective management of ownership transition would remain important. Also, generating stable operational cashflows is imperative. Meanwhile, a prudent financial strategy to meet financial obligations is critical.
Islamabad Farms was established in 1981 as an Association of Persons (AoP). Islamabad Farms operates 10 breeder farms to maintain parent flocks of different breeds and 3 hatcheries for day-old chicks. Its registered office is located in Satellite Town, Rawalpindi. While the farms and hatcheries are scattered across the country. Major ownership of Islamabad Farms resides with the family of the late Dr. Muhammad Aslam (~ 50%). His sons, Mr. M. Ali and Mr. M Hassan own an equal stake of ~15% each; followed by Dr. Aslam's daughters, Ms. Yumna Aslam (~ 7%) and Ms. Saleha Aslam (~ 7%), and his wife, Mrs. Alia Mehmood (~ 6%). The remaining holding vests with Dr. Azhar Mehmood (~ 25%), Mr. Muhammad Masood (~ 12.5%), and Mr. Mamoon-ur-Rasheed (~ 12.5%).