TOTAL PARCO Pakistan Limited

CREDIT RATING REPORT | Dec-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
20-Dec-24 AAA A1+ Stable Maintain YES
22-Dec-23 AAA A1+ Stable Maintain -
23-Dec-22 AAA A1+ Stable Initial -
About the Entity

Total PARCO Pakistan Limited ('Total PARCO' or 'the Company') is an unlisted public limited company. The principal activity of the Company is the marketing and sale of petroleum products. Lately, Gunvor Group (Gunvor) - through Aquashore – has acquired the entire stake of TotalEnergies Marketing and Services (TMS) (~50%) in the Company. While, Pak Arab Refinery Limited (PARCO) holds the remaining (~50%) JVs share. All legal and filling formalities are complete, and the BoD composition has also changed accordingly. The Company has a six-member Board. Three members represent PARCO and the other three are lately nominated by Gunvor. To enhance transparency in the practices of the Board, the Chairman is nominated by PARCO. The CEO of the Company, Mr. Asif Iqbal, enjoys the expertise of over 25 years in country management, retail, oil distribution/marketing, supply chain, and operations. His diverse experience spans numerous Asian countries within one of the largest energy groups in the world. Other members of the management, as well, are seasoned professionals with an average experience of more than 2 decades.

Rating Rationale

Total PARCO Pakistan Limited's ('Total PARCO' or 'the Company') ratings hold association with considerably strong and financially stable sponsors holding considerable presence across the energy supply chain. Total PARCO has held its mark as the largest international OMC operating in Pakistan. This along with sustaining the second-largest market share in the local OMC sector provides Total PARCO room to support the regulators. This can impact the overall structural landscape of the downstream OMC sector. Overall business and financial risk is managed well. The topline and profits remain sustainable. This along with the strategic decision to retain profits over an extended period has strengthened the Company's overall financial footing. Despite lower volumes due to weak demand and regulated pricing of PoL products, the Company remains adept in posting strong financial performance. Total PARCO's marketing and operations generate fairly stable cash flows, despite the volatility in international oil market prices and other persistent risks. The Company emphasizes a well-built and customer-centric strategy. Holding a contemporary vision well-aligned with the global energy transition, a recent structural shift in the Company's shareholding has been observed by bringing in Aquashore - a UAE-based subsidiary of Gunvor Group (Gunvor), a renowned and well-positioned global commodity trader - as a strategic acquirer of Total Energies Marketing Services (TMS) stake; hence, assigns a rating watch. This seems to shape new dynamics for Pakistan's OMC sector and the Company, going forward.

Key Rating Drivers

The ratings are driven by the Company's preserved financial metrics. Moreover, strategic initiatives including sustainable development goals benefits the ratings. This along with sound governance framework and control environment are in compliance with the overall operations. However, timely materialization of said acquisition is imperative.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

TOTAL PARCO Pakistan Limited

rating analysis

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Profile
Legal Structure

Total PARCO Pakistan Limited ('Total PARCO' or 'the Company') was incorporated as an unlisted public limited company in Nov-20 under the replead Companies Ordinance, 1984 (now called Companies Act, 2017).

Background

In 1997, TotalEnergies Marketing and Services (TMS), a French petroleum company, entered into a joint venture (JV) with Atlas Group to form Total Atlas Lubricants Pakistan (Pvt.) Ltd. (Total Atlas) to capture the local lubricant market. In 2020, TMS conceived another opportunity through a JV with Pak Arab Refinery Limited (PARCO) to enter Pakistan's OMC market and set up Total PARCO, which became commercially operational in Aug-01. Later, TMS acquired a ~100% stake in Total Atlas; while Total PARCO captured Chevron's local retail business. During Jan-15, the lubes and OMC businesses were merged providing Total PARCO a bigger product pallate. Lately, Gunvor Group (Gunvor) a global commodity trading company, has acquired the entire TMS stake (i.e. ~50%) in the Company.

Operations

Total PARCO is primarily engaged in marketing and selling petroleum products (PoL) along with manufacturing and selling lubes. Currently, the Company operates a retail network of ~853 stations, including ~7 company-operated sites. The Company holds owned and leased storage capacities of ~86,000MT and ~35,000MT, respectively. With access to a contracted fleet of over ~550 tankers, the Company relies on the White Oil pipeline and the Mahmoodkot-Faisalabad-Machike (MFM) pipeline to transfer PoL products across Pakistan. The registered office is located in Lahore.

Ownership
Ownership Structure

Initially, the Company was a JV between TMS and PARCO, each holding ~50% stake. However, lately, the entire stake of TMS (~50%) has been acquired by Gunvor, through Aquashore, after completing all the necessary approvals from relevant authorities.

Stability

PARCO is a government-owned refinery, while TMS was a French oil company that holds an operational history of over 100 years. Lately, the Competition Commission of Pakistan (CCP) has approved the strategic acquisition of TMS stake (i.e.~50%) by Aquashore - a UAE-based subsidiary of Gunvor, headquartered in Geneva, Switzerland.

Business Acumen

The JV partners have extensive experience in oil & lubricant trading along with the distribution & transportation of PoL products to OMCs across Pakistan and on global platforms. PARCO is among the largest refineries operating in Pakistan. TMS is ranked among the world’s major petroleum corporations; while considering the recent transition, Gunvor Group is a renowned and well-positioned global commodity trader holding networks across upstream and downstream channels.

Financial Strength

PARCO, AAA rated by PACRA, holds an equity base of ~PKR 152bln as of 3MCY23. While, TMS, AA- rated by Fitch, holds an equity base of ~USD 117bln. As the ownership transitions, Gunvor holds considerable financial footing, generating a turnover of ~USD 127bln provides a comfortable financial strength to the Company.

Governance
Board Structure

Overall control of the Company vests with a six-member Board (BoD), comprising three nominee Directors from each JV partner, i.e. PARCO and Gunvor. The composition ensures significant independence in the BoDs decision-making process.

Members’ Profile

Mr. Momin Agha, nominee Director by PARCO, has been chairing the Board since Aug-23 with an overall professional experience of around three decades. Currently, he is the Secretary of the Petroleum Division and chairs PARCO's board as well. Lately, Gunvor has nominated Mr. Patrcik Martin and Mr. Shahb Ricyal as Directors for Total PARCO's BoD. The nominee Directors from TMS - Mr. Mehmet Celepoglu and Mr. Mr. Kazi Rehman - has resigned from their respective positions. Other BoD members also carry diversified experience; thus, strengthening the BoD's policy formation process.

Board Effectiveness

The BoD meets on a quarterly basis with complete attendance and comprehensive documentation of minutes. For operational efficacy, the BoD has established three committees, namely Finance, Audit, and HR and Remuneration Committee. The Committee meetings are held on a quarterly basis with adequate attendance and comprehensive documentation of meeting minutes.

Financial Transparency

The External Auditors of the Company, M/s. KPMG Taseer Hadi, has expressed an unqualified opinion on the financial statements for the period ended Dec-23. The firm is QCR-rated and listed on the SBPs panel.

Management
Organizational Structure

The Company operates through seven departments - Finance, HR & Admin, Corporate Strategy & Compliance, HSSEQ, Consumer Sales & Specialties, Operations and Retail. All departmental Heads, titled as VP, report to the CEO, who then reports to the BoD. While, the Head of Finance, Internal Audit & HR functionally reports to the respective BoD Committee, and administratively to the CEO.

Management Team

Mr. Asif Iqbal heads the Company as the CEO since Oct-23. Mr. Asif brings over three decades of professional experience in the energy sector and has served as the CEO and Country Chair at TotalEnergies, Vietnam. Lately, Mr. Fareed Pervaiz has been appointed as the CFO of the Company. He has been associated for six years with Total PARCO and holds professional experience of almost two decades. Previously, Mr. Mansoor Murad served as the CFO of the Company. The management team comprises seasoned professionals, each bringing a range of expertise in their respective fields.

Effectiveness

The management decision-making process is currently facilitated by a Management Committee (ManCom), comprising all departmental Heads - VPs - that meets weekly to discuss pertinent matters and evaluate strategies. Minutes of the each meeting are documented comprehensively. Anticipating the need for enhanced management efficacy, as Gunvor joins in, management-level committees may add-in.

MIS

The Company’s operating environment relies on an IT infrastructure supported by SAP solutions that generates reports including general ledger, sales & purchase, inventory control, carriage & freight, etc., except for the HR module. The IT infrastructure, including KissFlow software, is effectively integrated with all the departments and ensures proper financial and operational control.

Control Environment

Total PARCO operates an in-house internal audit department to oversee risk management, control, and governance processes. This ultimately enhances business practices by establishing standard operating procedures (SOPs).

Business Risk
Industry Dynamics

Pakistan heavily depends on imports for its energy requirements due to limited domestic PoL production. A substantial increase in PoL import costs was witnessed due to global challenges. This along with rupee depreciation further impacted the local overall cost structure. During FY24, the demand for POL products declined by ~9% due to macroeconomic pressures. Transportation and Power sectors remain the main consumers, accounting for ~89% of the total demand. Despite having fixed margins, OMCs bear the impact of high working capital costs, which have risen sharply due to the aforementioned factors. This requires vigilance over the short to medium term for the OMC sector.

Relative Position

Total PARCO holds the second-highest market share in the OMC sector after PSO. The Company captures ~13% and ~10% market share based on the sale of MS and HSD, respectively.

Revenues

The Company generates revenue from MS (~60%), followed by HSD (~35%), HFO (~2%), Excellium/HOBC (~2%) and others (~1%). During CY23, the Company's revenue posted a growth of ~23% (CY23: ~PKR 590bln, CY22: ~PKR 479bln), attributable to price change. While the overall volumetric sales experienced a decline of ~15%. During 6MCY24, the Company reported a revenue of PKR 294mln. As Gunvor joins in, the revenue stream is expected to remain sustainable while enhancing operational efficiencies.

Margins

During CY23, gross margins declined to ~4.7% (CY22: ~6.3%) due to increased procurement costs. Similarly, the operating margin posted a dip to ~3.2% (CY22: ~4.7%) due to trickle-down effect. Despite holding substantial net income, the Company's net margins fell to ~1.4% (CY22: ~2.6%) as a result of high finance costs. Looking ahead, margins are expected to remain sustainable.

Sustainability

Total PARCO holds a customer-centric strategy with a contemporary vision well-aligned with the global energy transition. Focusing on this, a recent structural shift in the Company's shareholding has been observed by bringing in Aquashore - a UAE-based subsidiary of the Gunvor, a renowned and well-positioned global commodity trader - as a strategic acquirer of TMS stake. This seems to shape new dynamics for Pakistan's OMC sector and the Company, going forward.

Financial Risk
Working capital

Total PARCO manages a robust working capital cycle. Net working capital days remain substantially strong (CY23: ~13 days, CY22: ~11 days), owing to a well-managed inventory holding period (CY23: ~28 days, CY22: ~30 days) and payable cycle (CY23: ~20 days, CY22: ~23 days). Stable receivable days (CY23: ~4 days, CY22: ~4 days) further add strength. Despite some elongation in 6MCY24, overall the working capital cycle remains sound at ~23 days. The Company holds a borrowing cushion as per the industry's norms. Going forward, working capital management is anticipated to improve.

Coverages

As of CY23, the Company reported an FCFO of PKR 14bln, down by ~18% (CY22: PKR ~18bln) due to reduced profits. Interest cover was down, owing to higher finance costs, to 6x from 9.3x; however, remains strong. In 6MCY24, the Company managed its debt cover considerably well. Going forward, improvements in coverages are anticipated supported by lower interest rates resulting in reduced finance costs.

Capitalization

The Company maintains a low-leveraged capital structure, reporting debt to equity ratio of ~24% in CY23 (CY22: ~50%). Total borrowings of the Company stood at ~PKR 7.2bln (incl. current maturity) witnessing a substantial decline (CY22: ~PKR 21bln). The equity stood at ~PKR 25bln (CY22: ~PKR 21.4bln), owing to profit accumulation. In 6MCY24, leveraging remains at an optimal level (~39%). Going forward, the Company's capital structure is expected to remain strong.

 
 

Dec-24

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TOTAL PARCO Pakistan Limited

financial summary

(PKR mln)

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Jun-24
6M		 Dec-23
12M		 Dec-22
12M		 Dec-21
12M
A. BALANCE SHEET
1. Non-Current Assets 26,764 26,505 23,567 23,057
2. Investments 0 0 0 0
3. Related Party Exposure 0 0 0 0
4. Current Assets 55,749 56,614 60,437 39,114
a. Inventories 39,638 42,833 48,618 29,192
b. Trade Receivables 9,308 7,481 6,451 4,618
5. Total Assets 82,513 83,120 84,004 62,171
6. Current Liabilities 43,869 48,766 40,010 38,717
a. Trade Payables 31,956 33,236 30,002 30,914
7. Borrowings 14,455 7,799 21,329 12,349
8. Related Party Exposure 0 0 0 0
9. Non-Current Liabilities 1,723 1,538 1,232 426
10. Net Assets 22,466 25,016 21,433 10,679
11. Shareholders' Equity 22,466 25,016 21,433 10,679
B. INCOME STATEMENT
1. Sales 294,306 589,778 479,212 268,031
a. Cost of Good Sold (283,513) (561,890) (448,799) (252,711)
2. Gross Profit 10,792 27,889 30,413 15,321
a. Operating Expenses (5,052) (9,178) (8,029) (7,143)
3. Operating Profit 5,740 18,711 22,384 8,178
a. Non Operating Income or (Expense) (437) (3,250) (5,441) (1,827)
4. Profit or (Loss) before Interest and Tax 5,304 15,461 16,944 6,351
a. Total Finance Cost (622) (2,434) (2,044) (892)
b. Taxation (3,062) (4,744) (2,316) (1,780)
6. Net Income Or (Loss) 1,619 8,282 12,584 3,679
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) 3,051 14,422 17,663 7,602
b. Net Cash from Operating Activities before Working Capital Changes 2,716 12,635 16,150 7,279
c. Changes in Working Capital 3,391 10,134 (21,937) (6,107)
1. Net Cash provided by Operating Activities 6,107 22,769 (5,788) 1,172
2. Net Cash (Used in) or Available From Investing Activities (1,551) (3,797) (2,714) (1,972)
3. Net Cash (Used in) or Available From Financing Activities (4,339) (13,578) 1,019 4,513
4. Net Cash generated or (Used) during the period 216 5,394 (7,483) 3,712
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) -0.2% 23.1% 78.8% 38.4%
b. Gross Profit Margin 3.7% 4.7% 6.3% 5.7%
c. Net Profit Margin 0.6% 1.4% 2.6% 1.4%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) 2.2% 4.2% -0.9% 0.6%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 13.6% 35.7% 78.4% 41.5%
2. Working Capital Management
a. Gross Working Capital (Average Days) 43 33 34 31
b. Net Working Capital (Average Days) 23 13 11 1
c. Current Ratio (Current Assets / Current Liabilities) 1.3 1.2 1.5 1.0
3. Coverages
a. EBITDA / Finance Cost 10.1 7.5 10.0 12.9
b. FCFO / Finance Cost+CMLTB+Excess STB 2.3 4.8 5.9 0.9
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 1.0 0.4 0.3 1.7
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 39.2% 23.8% 49.9% 53.6%
b. Interest or Markup Payable (Days) 94.8 52.6 34.1 67.8
c. Entity Average Borrowing Rate 12.3% 13.8% 11.3% 6.5%

Dec-24

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TOTAL PARCO Pakistan Limited

rating scale

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Dec-24

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TOTAL PARCO Pakistan Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
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    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
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    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
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  5. Monitoring and Review
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    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
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    1. All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or otherwise reproduced, stored, or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent.

Dec-24

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