Muhammad Harris Ghaffar
PACRA Maintains Entity Ratings of Sargodha Jute Mills Limited
The ratings reflect Sargodha Jute Mills Limited’s (“the Company” or “SJML”) prominent business profile in the jute industry of Pakistan emanating from considerable market share and wide-ranging final product utility. The core strength of the Company lies in two segments (i) Usage of Jute bags for the storage of essential food items at a large scale and (ii) Predominately exports of Jute value-added products. Pakistan's jute industry imports 100% of its raw jute from Bangladesh. The prices of raw jute fluctuate in the international market and have been observing a downward sloping trend mainly on the back of demand squeeze in European markets as the global recession triggers. This price benefit is offset by the following factors (i)massive PKR devaluation over the year, (ii) a hike in the policy rate, (iii) a higher tax burden and (iv) consistent escalation in oil, gas and electricity prices have impacted the cost of production and exerted pressures on the margins. However, the Company was able to pass on a major portion of these costs to its customers. The rating takes comfort as despite these obstructive macroeconomic indicators the Company expects to sustain its top-line growth due to the nature of its product. The SJML have faced import restriction at a moderate level as ~40.0% of local sales are attributed to government departments and their final product utility classify under SBP circular No. 20 essential items- Imports related to essential sectors. The top line of the Company has observed a growth of 42% YoY basis mainly supplemented by 17% volumetric growth and remaining supply side inflation impact. The SJML export segment has shown an impressive growth of 53.3% YoY basis by exploring new export avenues and dispensing some hedge with respect to PKR devaluation. Going forward, the Company is focusing to induce further growth in its export segment. The ownership and the board structure are comprised of sponsoring family members. All members possess extensive industry-specific exposure and expertise. The financial risk profile of the Company is considered adequate with comfortable coverages, cashflows and a slightly stretched working capital cycle. Capital structure is leveraged, where borrowings are comprised of only short term to meet their working capital requirements. The Company’s topline performance is aligned with SJML management’s earlier shared financial projections which provides comfort to the rating sustainability.
The ratings are dependent on sustainable profits and market share while retaining sufficient cashflows and coverages. However, adherence to maintaining its debt metrics at an adequate level is a prerequisite.
Sargodha Jute Mills Limited was incorporated in 1981 as an unquoted public limited company in Pakistan. Mr. Parvez Aslam, through his two sons, Mr. Imran Aslam (28.3%) and Mr. Irfan Aslam (28.3%), and other family members own majority (~75%) shares of the Company. The remaining shareholding of the Company is held by an associated Company, Shahzad Textile Mills Limited (~25%). Sargodha Jute started operations with annual production of 5,000 metric tons in 1984. The Company has increased its annual production to ~30,500 metric tons over the years. The Company is involved in manufacturing and sale of jute products like hessian cloth, sacking bags, twines and yarn locally and in export market.