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Business Reporter

Cooking oil producer, Zimgold Oil Industries, has the capacity to fully redeem the commercial paper it intends to issue given that its operations constitute cash business commodities that have inelastic demand, leading stockbroking firm EFE Securities has said.

Zimgold Oil Industries, a unit of  Parrogate Zimbabwe, is in the market to raise US$5 million through a commercial paper available through private placement.

The paper, with a tenor of 180 days, and a coupon rate of 11 percent per annum.

According to management, the funds will be used to purchase soya beans and sunflowers for oil expressing, refining, and packing oil during the peak cost accumulation season.

Speaking just before a factory tour, as part of the roadshow, Zimgold finance director, Amit Goyal said the capital raise was necessitated by the need to buy a big crop from the current selling season.

“We have got facilities from our banks, they have been supporting us, but we realised the need is big, and that’s how we eventually came up with the commercial paper to have extra working capital,” said Mr Goyal.

Zimgold is pledging stocks comprising soya bean, edible crude and refined finished stocks of the company as security.

The company carries inventory of more than US$10 million at any given time according to management and is expected to be able to meet its obligations after 180 days.

According to EFE Securities, one of the arrangers for the instrument along with First Capital Bank,  Zimgold has the “capacity to fully redeem the commercial paper.”

In its commercial paper review, EFE said Zimgold is a “cash business producing commodities that have inelastic demand,” and this should allow it to meet its obligations when they are due.

In addition to its cash-generative capacity, Zimgold’s “product offering and competitive marketing strategies pose good opportunities for growth,” EFE said.

Further, Zimgold’s financials also stand as evidence that the company is in good financial standing and is not overburdened with debts, according to the stockbroking firm.

However, EFE cautioned that the commercial paper is set for redemption after the election period, “where trading conditions could have changed”.

Post-elections, there could be changes in the currency situation, statutory instruments on imports, and further challenges in the energy sector, therefore, increasing costs of production.

EFE said Zimgold was also trading in a highly volatile environment where its operations are mainly hinged on imports, and a change in the current operating environment could scupper the growth the company expects.

Inflationary pressures and exchange losses also affect the company operations, the stockbroking firm said.

The above factors could affect the company’s ability to meet its debt obligations.

However, Mr Goyal said whatever happens the firm will be able to meet its obligations in US dollar terms.

Executive chairman Mr. Pradyumn Ganediwal added that if there are any changes in the local economy that can affect the ability to pay in US dollars, the firm will ask for dollar funding from the Group’s central treasury “to discharge this obligation”.

Mr Goyal said the firm also has a significant amount of inventory in case of default.

He said for the more than two years he has been with the company, there has not been a single month of inventory that has been less than US$10 million.

“For the next six months, the level of inventory will be between US$25 million and US$30 million.

“In the unlikely case of default, which is almost 99,99 percent unlikely, if that happens, then the inventory is available to be discharged” to meet the obligations.

Mr Ganediwal said Zimgold is part of a much larger group with a combined revenue of US$6 billion and EBITDA of US$250 million.

According to EFE, Zimgold has an estimated net working capital of US$7.37 million “meaning that the company has sufficient capital to repay the debt if it were to close down”.

The company has a current ratio of 1.09x, therefore indicating that the company has $1.09 of current assets for every $1 of current liabilities, said EFE.