Muhammad Azmat Shaheen
PACRA Maintains Positive Outlook of Cherat Packaging Limited
The ratings reflect Cherat Packaging Limited’s ("CPPL" or the "Company") established position as one of the leading players in packaging sector (kraft paper sacks, polypropylene bags and flexible packaging). The Company is focusing on strengthening its position in export segment (PP Bags) and managed to increase its exports by 37.7% (FY21: PKR 366mln). Over the years, the Company has built a strong business profile and setting footprints in flexible packaging industry as well. As per management representation, the Company succeeded to maintain its market share in bags manufacturing segment at ~30%. The long-term prospects of the Company are linked with demand in local and foreign cement industries and flexible packaging businesses. The Company has managed to earn positive cash flows during FY'22 and 1QFY23. The profit margins of the Company decreased due to diminished growth in cement sector amid recent flood devastations. Further strategic relationships with international suppliers helped the Company in reaping benefits of high demand and effective inventory management. The Company installed new PP line IV in Feb'22, contributing a production capacity of 65mln bags/annum and taking the total production capacity to 260mln PP bags per annum. The Company has availed the Temporary Economic Refinance Facility (TERF) from SBP amounting to PKR 655mln, to finance this project.
Financial leveraging elevated at end of FY'22 and 1QFY23 attributable to inventory buildup in anticipation of higher future prices and raw material availability concerns, which resulted in elevated short-term borrowings, lower coverages and higher finance costs. The Company has moderately leveraged capital structure where the increase in short-term debt is attributable to recent supply chain management. Strong liquidity position of the Company is also evident from its current ratio of 4.8 times at end Sep'22 (FY22: 4.6 times; FY:21: 5.3 times).
The Company’s association with Ghulam Faruque Group bodes well for the ratings. Going forward, the Company should focus on increasing the foreign sales to gain exchange rate advantages and lack of management committees in organizational structure can be focus of further improvement.
The ratings are dependent upon the management’s ability to improve margins while sustaining its market share. Prudent management of the working capital, maintaining sufficient cash flows and coverages is imperative for the ratings. Materialization of management’s strategy of diversification through flexible packaging into better margins and profitability is important. Any significant decrease in margins and/or coverages will impact the ratings.
CPPL, incorporated in 1989, is a Ghulam Faruque Group Company, listed on the Pakistan Stock Exchange. Faruque Private Limited – holding company for the group – owns (10.25%), followed by Cherat Cement Company Limited (7.35%), Greaves Pakistan Private Limited (5.02%) and Mirpurkhas Sugar Mills Limited (4.97%). The remaining stake is held by the general public, public sector companies, financial and non-financial institutions. The Company is engaged in manufacturing, marketing and sale of paper sacks, polypropylene bags and flexible packaging material. The plant has production capacity of 660mln bags/annum (Kraft paper & PP bags) and 12.6mln Kgs (Flexible packaging material). The company has a long history of expansion and diversification. In 1992, the company started its production of paper sacks and diversified its business with manufacturing of polypropylene bags in 2012. In 2018, company entered in the field of flexible packaging.