The Pakistan Credit Rating Agency Limited
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Ateeb Riaz

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PACRA Maintains Entity Ratings of Sargodha Jute Mills Limited

Rating Type Entity
(30-Oct-19 )
(30-Apr-19 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

The ratings reflect Sargodha Jute Mills Limited’s strong profile in jute industry emanating from robust market share and margins. Pakistan's jute industry depends 100% on raw jute imports from Bangladesh. The prices of raw jute fluctuate in the international market and have been on a rising trend lately. This, coupled with devaluation of rupee in FY19, has increased the cost of raw material for the industry. The company was able to pass on these increased costs to consumers. The gross margins of the company improved in FY19 as management had purchased raw material earlier in anticipation of higher prices. The higher jute product prices impacted demand as the top-line declined by ~20% in FY19. The top-line growth is expected to remain subdued in FY20 due to imposition of sales tax and condition of CNIC for purchasers, going forward. The margins of the company may come under pressure as the volumes contract and further increase in costs is passed to an extant. The capital structure of the company is moderately leveraged comprising short-term borrowings only. The coverages of the company came under pressure due to significant increase in finance cost on the back of higher benchmark rate. The company manages its working capital adequately with cushion at trade level available. The ratings also incorporate strong financial strength of sponsoring family.
The ratings are dependent on the company's ability to maintain its revenues and margins. At the same time, diversification in top-line and products is critical. Substantial decrease of margins leading to lower profitability and/or deterioration in coverages will have implications on the ratings.

About the Entity
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 associate company, Shahzad Textile Mills Limited (~25%). The mill started operations with annual production of 5,000 metric tons in 1984 and over a period with expansion and improvement in operating systems, the mill has been able to achieve annual production of ~30,000 metric tons. The Company is involved in manufacturing jute products like hessian cloth, sacking bags, twines and yarn that are sold locally and exported as well.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.