JCR-VIS Reaffirms Ratings of Fatima Fertilizer Company Limited

Karachi, December 22, 2017 (PPI-OT):JCR-VIS Credit Rating Company Ltd. (JCR-VIS) has reaffirmed the entity ratings of Fatima Fertilizer Company Limited (FATIMA) at ‘AA-/A-1’ (Double A Minus/A-One). Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on December 21, 2016. Assigned ratings incorporate FATIMA’s significant market position, its association with well-established business groups of the country along with improvement in business risk profile. After a challenging 2016, industry dynamics of urea fertilizer manufacturers have witnessed noticeable improvement due to higher off-take (including exports) and lower production.

Resultantly, inventory levels have declined and pricing power has strengthened. JCR-VIS expects prices to increase towards the government set threshold on account of higher demand due to ongoing Rabi season and as inventory returns to normal levels. Moreover, risk of urea imports is considered low given the adequate stock levels. Ratings also factor in presence of a seasoned management team which has instituted a sound internal control infrastructure.

Ratings are supported by diversified product mix of the company. Sales were lifted by an integrated marketing campaign to promote combined usage of Nitrogen Phosphate (NP) and Calcium Ammonium Nitrate instead of conventional fertilizers and continuity of farmer outreach programs. Despite some pressure on margins due to increased price competition in nitrogenous fertilizers, the company’s bottom line has improved on the back of healthy volumetric growth. Availability of 110mmcfd feedstock gas supply to FATIMA at concessionary rate has enabled it to maintain better margins in relation to most peers. Moreover, increase in international Di-ammonium Phosphate prices will result in higher profits from phosphate (NP) business during 4Q17. Given the significant international capacities coming online in 2H2018, risk of decline in international prices from current levels of phosphate based fertilizers remains.

Despite the challenging sector dynamics, financial metrics including cash flows in relation to total debt have largely remained within benchmark limits for the assigned ratings. Recently, the company has announced merger of FATIMA and its wholly-owned subsidiary, Fatimafert Limited (subject to receipt of all requisite corporate and regulatory approvals). While cash flow metrics of the company are expected to weaken post-merger, management expects the merger to add value to consolidated results of the company from the benefits of synergies, cost efficiencies and better use of brands. JCR-VIS expects financial metrics post-merger to remain in line with benchmarks for the assigned ratings. Impact on financial profile of FATIMA (post-merger) with respect to cash flows will continue to be tracked by JCR-VIS.

FATIMA plans to invest US$ 300million in a US-based fertilizer company, Midwest Fertilizer Company. To finance the investment, FATIMA plans to issue a foreign currency bond in the international debt market. Subsequent to transaction completion, gearing levels of the company are expected to increase. As a key rating consideration, future trend with respect to leverage indicators will continue to be tracked by JCR-VIS.

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