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
(03-Apr-20 )
(30-Oct-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, adequate 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 and higher finance cost, has increased costs for the industry. The Company was able to pass on these increased costs to consumers. However, the higher jute product prices, imposition of sales tax and CNIC requirement on buyers from July 01, 2019, has impacted demand in 1HFY20. The top-line of the Company declined by ~28% and is expected to remain subdued in FY20. Provincial Government has imposed lock down due to Corona Virus outbreak recently. However, the Company remains exempt from this due to its products being used for food storage. Extended lock down will put pressure on sales, nevertheless. The Company's profitability came under pressure due to lower sales and higher finance costs. The recent 225bps cut in interest rate is expected to provide some relief, going forward. The capital structure of the Company is moderately leveraged comprising short-term borrowings only. The Company reduced its borrowings during 1HFY20. The Company manages its working capital adequately with cushion at trade level available with strong coverages. The ratings incorporate financial strength and proven track record of the sponsoring family.
The ratings are dependent on the company's ability to maintain its revenues and margins. Substantial decrease in margins leading to lower profitability and/or deterioration in coverages will have implications on the ratings. At the same time, continuation of production activity during Corona Virus outbreak is critical.

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%). 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.

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.