JCR-VIS Credit Rating Company Limited
Rating Report
Affiliate of Japan Credit Rating Agency, Ltd.
Engro Foods Limited
Chairman: Mr. Aliuddin Ansari; Chief Executive: Mr. Sarfraz A. Rehman
February 11, 2015
Rating Rationale
Analyst: Faryal Ahmad
Moiz Badshah
Category
Sukuk
Latest
A+
Dec 31, 2014
Outlook
Previous
A+
Jan 21, 2013
Stable
Dec 31, 2014
Stable
Jan 21, 2013
Key Financial Trends
28
24
20
16
12
8
4
0
9M14
Gross Margin (%)
ROAA (%) (annualized)
6
5
4
3
2
1
0
2013
2012
Net Margin (%)
_________________________________________
9M14
Gearing (x)
(Rs. billion)
2013
2012
Debt Servicing (x) (annualized)
9M14
2013
2012
Net Sales
30.7
37.9
40.2
Net Profit
0.3
0.2
2.6
Net Equity
10.9
10.7
10.0
Debt Leverage (x)
1.4
1.2
1.2
Total Debt
10.1
8.2
7.8
(inc. current
maturity)
7.2
8.2
7.7
FFO (annualized)
1.5
2.4
4.5
0.15
0.3
0.6
3.1
2.0
29.2
Long Term Debt
FFO (annualized)
/Total Debt (x)
ROAE(%)
(annualized)
Engro Foods Limited is operating in the consumer goods segment, and is engaged in the
manufacturing, processing and sale of dairy products, beverages, ice cream and frozen
desserts. Over the years, the business has been able to establish several brands which have
become household names in Pakistan. These include Olper’s (Milk), Omore (Ice cream),
Dairy Omung (UHT dairy liquid) and Tarang (tea whitener), to name a few.
Engro Foods had displayed a positive growth trajectory with the top-line having shown a
cumulative annual growth rate (CAGR) of 50%, increasing from Rs. 1.5b in 2006 to Rs. 38b
in 2013. The financial results of the company have however come under stress over the last
two years, with sales declining in 2013, though expected to have recuperated in 2014. With
narrowed gross margins (2012: 25.7%; 2013: 21.6%; 9M14: 18.5%), the company’s earnings
from core operations and cash flows have witnessed a declining trend. The company’s profit
before provisions and taxes declined from Rs. 3.9b in 2012 to Rs. 1.4b in 2013 and Rs.
394.2m in 9M14. Over this period, funds from operations also declined considerably (2012:
Rs. 4.5b; 2013: Rs. 2.4b; 9M14: Rs. 1.1b), resulting in reduced debt service coverage.
Moreover, bottom line was further impacted by the provisioning charge that was taken
primarily against the company’s investment in Engro Foods Netherlands B.V., a wholly
owned subsidiary and the company registered a loss before tax of Rs. 164.6m in 9M14.
Total debt increased from Rs. 7.8b in 2012 to Rs. 8.2b in 2013 and further to Rs. 10.1b by
end 9M14. Over the years, the company had primarily utilized long term financing and
working capital requirements were met through internal cash generation. However, in 9M14,
short term debt was mobilized for working capital purposes. In addition to this, short term
investments previously carried on balance sheet were also liquidated to meet the company’s
working capital requirements, in the backdrop of reduced internal cash generation (2012: Rs.
2.7b; 2013: Rs. 170m; 9M14: nil).
Despite the stress on earnings and cash flows, Engro Foods continued to develop its existing
product segments by re-vamping its distribution network. As a result, capital expenditure
amounted to Rs. 5.2b in 2013 as opposed to Rs. 2.5b in 2012. A further capex of Rs. 2.2b was
incurred in 9M14.The management is projecting improvement in financial results, going
forward. While profitability is expected to improve given that major portion of provisioning
expense has already been absorbed, improvement in cash flows depends on the realization of
management’s projections regarding margins. Moreover, the company has no major capex
planned for the foreseeable horizon. The financial results of the company will continue to be
closely monitored; in the absence of turnaround in financial indicators, ratings could come
under stress.
The company had issued Sukuk certificates of Rs. 950m in 2009. Repayment of the Sukuk
commences from July 2015. Principal will be redeemed in four unequal installments in the
seventh and eighth year. Sukuk payment due in CY2015 amounts to Rs. 71.25m.
Overview of the Institution
Engro Foods Limited was incorporated in April 2005 and was listed on Karachi and Lahore Stock
Exchanges in 2011. Engro Corporation Limited continues to be the main sponsor, with a holding
of 87% in the company. External auditors of the company for 2013 were A. F. Fergusons &
Company, who have been re-appointed for 2014 JCR-VIS
Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or
omissions or for the results obtained from the use of such information. JCR-VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the credit rating(s) mentioned in this report. JCR-VIS is not an
NRSRO and its ratings are not NRSRO credit ratings. JCR-VIS is paid a fee for most rating assignments. This rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. Copyright 2015 JCR-VIS Credit Rating Company
Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.
JCR-VIS Credit Rating Company Limited
Affiliate of Japan Credit Rating Agency, Ltd.
Engro Foods Limited Rating History
Rating
Date
Medium to
Outlook
Short Term
Long Term
Rating Type – TFC-1
Rating
Action
12/31/2014
A+
Stable
Reaffirmed
1/21/2013
A+
Stable
Upgrade
4/26/2011
A
Stable
Upgrade
1/7/2010
A-
Positive
Maintained
1/6/2009
A-
Stable
Final
8/13/2008
A-
Stable
Preliminary