VIS Reaffirms ‘A+’ Rating for Sukuk 2 Issue of OBS Pakistan.

Karachi: VIS Credit Rating Company Limited (VIS) has reaffirmed the instrument rating of ‘Sukuk 2’ issue of OBS Pakistan (Private) Limited at ‘A+’ (‘Single A Plus’). The long-term rating indicates good credit quality with adequate protection factors, though risk factors may vary with potential economic changes. The outlook on the assigned ratings remains ‘Stable’, with the previous rating action announced on February 28, 2024. The entity rating of OBS Pakistan stands at ‘A/A2’ (‘Single A/A Two’), also maintaining a ‘Stable’ outlook.

According to VIS Credit Rating Company Limited, OBS Pakistan was incorporated 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 focuses on the import, marketing, export, dealership, distribution, and wholesale of pharmaceutical products. Its operations began in 2023 following the acquisition of 17 pharmaceutical brands from Viatris Inc. and Pfizer Pakistan, with 10 brands actively marketed. The acquisition was financed through 73% debt and 27% equity, with the debt portion raised via two sukuks amounting to Rs. 3.6 billion and Rs. 2.9 billion respectively.

The Sukuk, issued in February 2024, totals Rs. 2.9 billion with a 7-year tenor and an 18-month grace period. It offers a profit rate of 3M KIBOR plus a 1.60% spread, with principal payments scheduled over 22 quarters. Profit payments are made quarterly, with the latest completed in August 2024. The security structure includes a mortgage/hypothecation charge on AGP’s fixed assets, a corporate guarantee from AGP, and a designated collection account for revenue receipts.

The ratings consider the low business risk profile of Pakistan’s pharmaceutical sector, characterized by stable demand and low economic sensitivity, which supports consistent revenue and profitability. Factors such as population growth, disease prevalence, emerging illnesses, and hygiene conditions maintain the demand for pharmaceutical products. However, profitability faces pressure from price caps on essential drugs enforced by the Drug Regulatory Authority of Pakistan (DRAP), along with exposure to exchange rate risks due to the import of 70-80% of raw materials. The recent deregulation of drug prices for Non-Essential Medicines allows companies to raise prices independently, aiding the sector’s business risk profile.

The ratings also factor in strong sponsor support from AGP Limited, including a corporate guarantee securing the Company’s debt. OBS Pakistan’s shift in distribution is expected to expand market reach and enhance operational efficiency through connections with a broader network of pharmacies, retail chemists, institutional sales, and e-commerce channels. However, portfolio concentration risk remains, necessitating mitigation over time for ratings stability.

OBS Pakistan’s favorable financial risk profile is reflected in improved sales volumes and a one-off price adjustment approved by the government. With pre-negotiated product costs securing supply from Pfizer Pakistan during the transition, the Company reported stable gross margins. Future ratings are supported by anticipated supply chain efficiencies and improved profitability in the medium term, through plans to manufacture imported active brands at AGP’s facilities. Despite stress on cash flow coverages due to constrained profitability, working capital support from the parent company provides some relief. Acquisition financing impacted the capitalization profile, with increased gearing and leverage ratios. The rating’s outlook remains sensitive to strengthening the equity base, reducing debt levels, and maintaining effective liquidity management.

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