VIS Reaffirms ‘A+’ Rating for OBS Pakistan’s Sukuk 1 Issue.

Karachi: VIS Credit Rating Company Limited (VIS) has reaffirmed the instrument rating of ‘Sukuk 1’ issue of OBS Pakistan (Private) Limited (‘OBS Pakistan’ or the ‘Company’) at ‘A+’ (‘Single A Plus’). The long-term rating of ‘A+’ signifies good credit quality with adequate protection factors, although risk factors may vary with potential economic changes. The outlook on the assigned ratings remains ‘Stable.’ The previous rating action was announced on August 23, 2023. OBS Pakistan’s entity rating is ‘A/A2’ (‘Single A/A Two’) with a ‘Stable’ outlook.

According to VIS Credit Rating Company Limited, OBS Pakistan was established on December 07, 2021, as a private limited company and operates as a subsidiary of AGP Limited, which holds a 91.82% ownership stake. The company is primarily involved in importing, marketing, exporting, dealing, distributing, and wholesaling pharmaceutical products. It began operations in 2023 after acquiring 17 pharmaceutical brands from Viatris Inc. and Pfizer Pakistan, actively marketing 10 brands—3 manufactured locally and 7 imported. This acquisition was funded through 73% debt and 27% equity, with the debt portion raised via two sukuks of Rs. 3.6 bn and Rs. 2.9 bn, respectively.

The Sukuk, issued in September 2023, amounts to Rs. 3.6 bn and has a 7-year tenor with an 18-month grace period from disbursement. It features a profit rate of 3M KIBOR plus a 1.60% spread, with principal payments spread over 22 quarters. Profit payments are made quarterly and have been timely, with the most recent payment completed in August 2024. The security structure includes a hypothecation charge on future fixed assets of OBS Pakistan, share pledges by AGP’s major shareholder, a corporate guarantee from AGP, and a collection account for OBS Pakistan’s revenue flow, while the Financing Payment Account (FPA) is replenished two working days before each installment due date.

The assigned ratings reflect Pakistan’s pharmaceutical sector’s low business risk profile, characterized by stable demand and low economic sensitivity, supporting consistent revenue and profitability. Factors such as population growth, disease prevalence, emerging illnesses, and hygiene conditions sustain demand for pharmaceutical products. However, profitability remains under pressure due to price caps on essential drugs enforced by the Drug Regulatory Authority of Pakistan (DRAP). Additionally, the import of 70-80% of raw materials exposes companies to exchange rate risks. Nevertheless, the recent deregulation of drug prices for Non-Essential Medicines allows companies to independently adjust prices, further supporting the sector’s business risk profile.

The ratings also consider the strong sponsor support from AGP Limited, including a corporate guarantee securing the Company’s debt. Furthermore, the Company’s shift in distribution is expected to expand market reach and enhance operational efficiency by connecting with a broader network of pharmacies, including retail chemists, institutional sales, and e-commerce channels. However, portfolio concentration risk remains a concern, and mitigating this over time will be crucial from a ratings perspective.

The ratings also take into account the Company’s financial risk profile. OBS Pakistan reported favorable topline performance this year, driven by a significant increase in sales volumes and a one-off price adjustment approved by the government. During the ongoing transition period, product supply from Pfizer Pakistan has been secured, addressing cost variability risks through pre-negotiated product costs. Consequently, the Company reported stable gross margins during the review period. Going forward, the rating is supported by expected supply chain efficiencies and improvements in the Company’s profitability profile in the medium term, facilitated by plans to manufacture most imported active brands at AGP’s facilities. However, cash flow coverages were under stress due to constrained profitability in the ongoing year, and management anticipates liquidity to remain under strain due to increased current liabilities from the debt-financed acquisition. Nonetheless, comfort is drawn from working capital support pl
edged by the parent company. The acquisition financing impacted the capitalization profile, with both gearing and leverage ratios increasing over the rating horizon. The rating remains sensitive to the gradual strengthening of the equity base, reduction in debt levels, and effective liquidity management.

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