PACRA Upgrades the Entity Ratings of Swat Agro Chemicals

The agricultural industry plays a pivotal role in Pakistan's economy, contributing ~23% to the GDP and serving as a key source of raw materials for numerous industries. The industry heavily relies on pesticides, i.e. agrochemicals, to improve crop production, which in turn are significantly dependent on imports as ~85% to ~90% of raw materials for pesticides are imported, primarily from China. During FY23, the pesticide sector was valued at ~PKR 103.7bln with a YoY increase of ~5.4% attributed to the expansion in the agricultural industry and a subsequent rise in demand. Also, the increased prices supported the upward trend. The pesticides sector remains dependent on imports, with low levels of R&D, therefore exposure to prices and exchange rate movement remain the major risk factors. Characterized by low to medium business and financial risk, the sector’s outlook is expected to remain stable.
The assigned ratings of Swat Agro Chemicals ('Swat Agro' or 'the Business') drive strength from the sponsor's substantial experience in the pesticide industry. The Business holds an established presence in the domestic market, with a wide range of products, namely insecticides, fertilizers, micronutrients, fungicides, household products, weedicides, adjuvants, and agri-equipments. The ratings gather support from Swat Agro's strategic collaboration with BASF, a US-based chemical company, alongside the installation of a high-standard SC & EC formulation plant. As part of its expansion strategy, the Business is actively pursuing initiatives in seed development, packaging, and the real estate segment. Swat Agro's business risk profile remains consistent and reflects sustainability. The Business primarily generates revenue from micronutrients (~28%), followed by insecticides (~26%), fertilizers (~24%), fungicides (~13%), household products (~5%), weedicides (~3%), and adjuvants and agri-equipment (~1%). Revenue grew by ~60%, registered by inflated prices and increased volumes. Business margins remain robust, holding a solid bottom line. On the financial risk front, the Business meeting its working capital needs through internal cash flows and short-term borrowings. A low-leverage capital structure and solid coverage add support to the overall ratings. PACRA upgrades the entity ratings based on substantially improved overall performance, with strong and manageable financial risk profile. However, strengthening the governance framework, enhancing financial transparency - by inducting an SBP panel's auditor, and developing strong internal controls remains imperative to ratings, going forward.
The ratings are dependent on Swat Agro's ability to sustain the operations, keeping the business and financial profile at an optimal level. Moreover, strict adherence to debt matrix along with maintaining cashflows and coverages at an adequate level remains imperative. This along with improved governance framework and internal controls would benefit ratings.

About the Entity
Swat Agro Chemicals ('Swat Agro' or 'the Business') was incorporated in 1996 as a partnership concern as per the Partnership Act, 1932. Ownership resides among three partners, where major stake (~50%) lies with Mr. Barkat Ali Khan. While, the remaining stake i.e. ~50 % is held equally by Ms. Fouzia Nazneen and Mr. Muhammad Alam Khan. Mr. Barkat Ali Khan heads the Business as the CEO, and is assisted by an experienced management team.