PACRA Maintains Entity Ratings of Sargodha Jute Mills Limited

The ratings reflect Sargodha Jute Mills Limited’s (“the Company” or “SJML”) prominent presence in the jute industry of Pakistan emanating from considerable market share and wide-ranging final product utility owing to its legacy of over 4 decades. The company’s core operations constitute the manufacturing and sale of Jute products including sacking bags, hessian cloth, hessian bags, yarn, and twines. The inherent 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 sector is entirely reliant on imports to cater to its raw material needs and imports 100% of its material from Bangladesh owing to the quality and cost-effectiveness of the product. Jute prices fluctuate globally given the demand and supply dynamics and productivity of the Jute crop. During last year, the prices remained on a downward trajectory owing to dampened demand. This price benefit was partially offset by the massive PKR devaluation over the year, a hike in the policy rate that triggered a steep incline in the finance costs, a higher tax burden, and a consistent escalation in oil, gas, and electricity prices that have significantly impacted the cost of production and exerted pressures on the profitability margins. However, the Company was able to pass on a major portion of this cost escalation to its customers. The rating takes comfort as despite these obstructive macroeconomic indicators the company was able to sustain the growth trajectory in its top-line owing to the nature of its products as these are preferred for the storage of wheat and other crops owing to their biodegradability, breathability, and superior tensile strength which supports higher shelf life. The top line of the Company has observed a growth of 24.5% YoY primarily attributable to price hikes and stable demand. The SJML export segment has remained stagnant in FY23 and posted a marginal decline. The company sustained its Gross Profit Margin of ~13%. However, the bottom line of the company diluted owing to a significant increase of ~84% in the finance costs of the company and notional loss booked on the decline in the value of equity securities held by the company. Going forward, the Company is focusing on 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 owing to the seasonal nature of the business.
The ratings are dependent on sustainability of profits and market share while retaining sufficient cashflows and coverages. However, adherence to maintaining its debt metrics at an adequate level is a prerequisite.

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 associated Company, Shahzad Textile Mills Limited (~25%). Sargodha Jute started operations with an annual production capacity of 5,000 metric tons in 1984. The Company has steadily increased its annual production capacity to ~30,500 metric tons over the years.