Starch Pack (Pvt.) Limited

CREDIT RATING REPORT | Dec-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
06-Dec-24 A A1 Stable Maintain -
07-Dec-23 A A1 Stable Initial -
About the Entity

Starch Pack (Pvt.) Limited ('Starch Pack' or the 'Company'), incorporated as a private limited company in Jun-21, manufactures and sells corn-based starch products, derivatives and by-products. The Company is a wholly owned subsidiary of Packages Limited, with a manufacturing plant located in Kasur, Punjab. Mr. Imran Khalid Niazi chairs the Board; while, Mr. Fazeel Ur Rehman heads the Company as the CEO.

Rating Rationale

Starch Pack (Pvt.) Limited ('Starch Pack' or the 'Company') is a recent venture of Packages Group (the 'Group') that holds considerable footing across the packaging value chain through Packages Limited and the financial sector through IGI Holdings. The Company is set up as a part of a backward integration vision of the packaging value chain to create synergies across the Group. Starch Pack manufactures and sells corn-based native and modified starches and their derivatives and by-products, such as Glucose and unrefined Corn Oil. Pakistan's corn sector is ~100% localized, with the space holding sufficient growth opportunities due to minimal competition from large players. The product, corn-based native and modified starch serves as a vital input for three of Pakistan's largest local industries: the textile, paper, and packaging sectors. This and stable demand from within the Group - Bulleh Shah Packaging (Pvt.) Ltd. - and the central Punjab region provides comfort to the ratings. Moreover, the strategic location of the Company's manufacturing facility provides easy and quick access to corn and gives economies of scale. The ratings include the key advantage of the Group's international presence, yielding an established footprint in the international market for Starch Pack. Currently, the Company is focusing on enhancing its sales firstly in the local market and thereafter export; this is crucial to achieve operational breakeven. To cover the gap, the parent company intends to inject equity. Requisite oversight and continuous financial support from the Group will ensure the Company achieves and maintains operational efficiency. Sponsors' strong acumen and a developed governance framework benefit the ratings. Starch Pack's lean organizational structure is expected to evolve as the Company grows from the initial gestation phase. Moreover, a well-equipped and experienced management team provides comfort. This, along with a sound control environment, adds respite.

Key Rating Drivers

The ratings are contingent upon the continued Group synergies, local and international commercial production materialization, and the Company's continued efforts to control business margins. Moving forward, market penetration and maintaining competitive advantage remains important. Moreover, effective management of the working capital cycle and retention of key management are paramount to the assigned ratings.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Starch Pack (Pvt.) Limited

rating analysis

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Profile
Legal Structure

Starch Pack (Pvt.) Limited (‘Starch Pack’ or ‘the Company’) was incorporated as a private limited company in Jun-21 under the repealed Companies Ordinance, 1984 (now called the Companies Act, 2017).

Background

Starch Pack is a recent venture of Packages Group (the 'Group') that holds considerable footing across the packaging value chain through Packages Limited and the financial sector through IGI Holdings. The Company is set up as a part of a backward integration vision of the packaging value chain to create synergies across the Group.

Operations

Starch Pack manufactures and sells corn-based native and modified starches and their derivatives and by-products, such as Glucose and Corn Oil. The grinding capacity of the plant is 250 tons per day. The Company's manufacturing plant is in Kasur, Punjab, while the head office is in Lahore.

Ownership
Ownership Structure

Starch Pack is a wholly owned subsidiary of Packages Limited.

Stability

The Company's ownership structure is expected to remain stable as the Group is among the largest and well-established investment holdings in Pakistan.

Business Acumen

The Sponsors hold a strong acumen in managing interests in paper and paperboard, packaging, financial institutions, education, and real estate sectors. A strong affiliation with international associations suits the Group's investment structure.

Financial Strength

Requisite oversight and financial support from the Group ensure the Company's financial strength. The Group's consolidated assets stand at ~PKR 245bln as of 9MCY24 with an equity base of ~PKR 88bln.

Governance
Board Structure

Overall control of the Company vests with a nine-member Board (BoD) comprising three Executive Directors, three Non-Executive Directors, and three Independent Directors. The BoD has six nominee Directors from Packages Limited and substantial independence in decision-making.

Members’ Profile

The BoD, with a well-diversified background and relative expertise of its members, is a key source of oversight and guidance for the management. The Chairman, Mr. Imran Khalid Niazi, has been associated with the BoD since 16-Jan-23. He is a seasoned professional with technical expertise gained from multinationals. Other BoD members also carry diversified experience, thus strengthening the BoD's policy formation process.

Board Effectiveness

The BoD met twice during the last quarters, with the majority attending, to discuss pertinent matters. While the minutes of the meetings are documented, there is room for improvement concerning the details and clarity of the minutes. To ensure effective governance, three committees assist the BoD, namely i) Audit Committee, ii) Human Resource and Remuneration Committee, and iii) IT Steering Committee.

Financial Transparency

Starch Pack has appointed M/s A.F. Ferguson & Co. as the Company's external auditor. The auditor has expressed an unqualified opinion on the financial reports of CY23.

Management
Organizational Structure

The Company operates through i) EHS, ii) Administration and Security, iii) Supply chain, iv) Sales and Marketing, v) Human Resources, and vi) IT. All department Heads report to the respective Group Head, who reports to the CEO. The CEO reports to the BoD. The organizational structure is well-defined, with clear lines of responsibility. The dual reporting framework allows for an enhanced oversight framework.

Management Team

Mr. Fazeel Ur Rehman heads the Company as the CEO. He has been associated with the Group for over two decades and has served as the CEO of OmyaPack. Mr. Ali Wajid, the CFO, has been associated with the Group for over a decade and has worked in many key positions in various Group companies. The management team comprises seasoned professionals, each bringing expertise in their respective fields.

Effectiveness

The Sponsors' experience, along with a professional management team, helps the Company streamline its operations. However, anticipating the need for enhanced management efficacy, there are envisaged plans to add management-level committees in the future.

MIS

A web-based real-time ERP solution is required to generate comprehensive MIS reports covering the operations of all segments within the Company. Starch Pack has been using SAP ERP (ERP ECC6) as its primary ERP software since its inception, and its implementation partner has been Excellence Delivered (ExD). The Company gets ERP support from Excellence Delivered Pakistan Limited in line with the Packages Group synergy.

Control Environment

To ensure operational efficiency, the Group has a centralized internal audit function that reports to the BoDs Audit Committee. The Company has set up effective mechanisms for identifying, assessing, and reporting all types of risks arising from the business operations. These risks include strategic, operational, financial, or compliance risks, which may compromise achieving the Group's overall business objectives.

Business Risk
Industry Dynamics

The food and textile industries are fast-paced. The Company’s success depends on understanding customer requirements, anticipating future trends, challenges, and opportunities, and partnering with suppliers and human capital to discover long-term and sustainable solutions for all our stakeholders. The high inflation and political uncertainties impacted food ingredient demand, consumption demands, and customer base.

Relative Position

The Company is in the early stage of its life cycle and facing entity-related challenges leading to operational losses while other competitors are already established. Initially, sales are generated from the Group companies only, followed by a subsequent market expansion. Thus, the Company's relative position as a standalone entity can not be derived yet.

Revenues

During 9MCY24, the Company reported a revenue of ~PKR 2,375mln. Native starch accounted for the majority of the revenue (~53.6%) at ~ PKR 1,273mln. The Company’s second most grossing category was by-products (~24.3%), which yielded a total revenue of ~PKR 579 mln. The Company’s reliance on trading goods was (~ 0.75%) highlights the steps taken by the Company to diversify its product offerings and reduce its prior reliance on trading goods. Going forward, the revenue stream is expected to grow and enhance operational efficiencies.

Margins

During 9MCY24, the Company posted a gross loss that stood at ~PKR (143) mln, trickling into a net loss of ~PKR (1,066) mln as the Company was in its initial gestation phase. Procurement costs, admin expenses, and financial charges remain the main expense for the Company. As revenues require time to stabilize, business margins are negative; however, they have improved since CY23.

Sustainability

The Group has a well-established mark in the packaging segment. Starch Pack has to strengthen its footprint along with a capacity expansion that streamlines the utilization levels and conversion costs. The Company must instill flexible plans to overcome the current challenges.

Financial Risk
Working capital

Starch Pack’s working capital requirements are a function of its inventory, trade receivables, and trade payables financed through short-term borrowings. The Company is managing its receivables on cash with a minimal inventory holding period. The Company's credit term falls within 30 days. Payment discipline is required. The acquisition of raw materials (corn grains) will be divided into 10-12 months cycles (12 months total). Except for raw material (corn), payables are cleared within 30 to 45 days. This helps the Company to handle working capital more efficiently and effectively. The Company requires to maintain a positive borrowing cushion going forward.

Coverages

The Company’s overall interest cover has improved since CY23 but remains negative due to initial gestation challenges. During 9MCY24, FCFO stood at ~PKR (74) mln with an interest cover (0.1)x. Going forward, coverage improvements are anticipated to be supported by lower interest rates, resulting in reduced finance costs.

Capitalization

The Company holds an ordinary share capital of ~PKR 3bln with an equity base of ~PKR 1.2bln depleted due to consistent losses during the initial gestation phase. The projected growth in the asset base will be financed primarily through borrowings along with an expected equity injection of ~PKR 2bln. This makes the debt to equity ratio significant at ~86^ as of 9MCY24. This is expected to stabilize as envisioned plans are successfully materialized as projected.

 
 

Dec-24

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Starch Pack (Pvt.) Limited

financial summary

(PKR mln)

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Sep-24
9M		 Dec-23
12M		 Dec-22
12M		 Dec-21
12M
A. BALANCE SHEET
1. Non-Current Assets 7,692 6,930 3,663 304
2. Investments 0 0 322 1,100
3. Related Party Exposure 576 58 12 0
4. Current Assets 1,962 2,210 849 96
a. Inventories 681 1,146 191 0
b. Trade Receivables 13 12 0 0
5. Total Assets 10,230 9,198 4,846 1,500
6. Current Liabilities 765 696 145 4
a. Trade Payables 296 185 66 2
7. Borrowings 7,854 5,642 1,641 0
8. Related Party Exposure 137 85 184 15
9. Non-Current Liabilities 227 345 0 0
10. Net Assets 1,246 2,430 2,876 1,481
11. Shareholders' Equity 1,246 2,431 2,877 1,481
B. INCOME STATEMENT
1. Sales 2,365 52 0 0
a. Cost of Good Sold (2,509) (225) 0 0
2. Gross Profit (143) (172) 0 0
a. Operating Expenses (234) (46) (28) (21)
3. Operating Profit (377) (218) (28) (21)
a. Non Operating Income or (Expense) 5 10 37 9
4. Profit or (Loss) before Interest and Tax (373) (208) 8 (12)
a. Total Finance Cost (927) 88 (13) 697
b. Taxation 234 80 0 (3)
6. Net Income Or (Loss) (1,066) (40) (5) 682
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) (74) (216) (43) (13)
b. Net Cash from Operating Activities before Working Capital Changes (1,310) (538) (43) (13)
c. Changes in Working Capital (121) (1,319) (535) 13
1. Net Cash provided by Operating Activities (1,431) (1,857) (578) 0
2. Net Cash (Used in) or Available From Investing Activities (765) (2,729) (3,278) (1,404)
3. Net Cash (Used in) or Available From Financing Activities 664 3,596 3,014 1,496
4. Net Cash generated or (Used) during the period (1,532) (989) (843) 92
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) 5915.6% N/A N/A N/A
b. Gross Profit Margin -6.1% -328.2% N/A N/A
c. Net Profit Margin -45.1% -75.9% N/A N/A
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) -8.3% -2927.4% N/A N/A
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] -77.3% 7.7% -0.7% 93.1%
2. Working Capital Management
a. Gross Working Capital (Average Days) 107 8494 N/A N/A
b. Net Working Capital (Average Days) 79 7621 N/A N/A
c. Current Ratio (Current Assets / Current Liabilities) 2.6 3.2 5.9 23.0
3. Coverages
a. EBITDA / Finance Cost -0.0 2.0 0.9 0.0
b. FCFO / Finance Cost+CMLTB+Excess STB -0.0 2.5 -3.2 0.0
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) -5.0 -39.2 -29.2 0.0
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 86.3% 69.9% 36.3% 0.0%
b. Interest or Markup Payable (Days) 101.0 -1872.7 1939.7 0.0
c. Entity Average Borrowing Rate 17.9% -2.8% 0.8% #DIV/0!

Dec-24

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Starch Pack (Pvt.) Limited

rating scale

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Dec-24

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Starch Pack (Pvt.) Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
    5. PACRA maintains the principle of integrity in seeking rating business. (Chapter III; 11-A-(u))
    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
    1. PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on PACRA’s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity, and independence of its ratings. Our relationship is governed by two distinct mandates: i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and ii) fee mandate - signed with the payer, which can be different from the entity.
    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
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  5. Monitoring and Review
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    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
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Dec-24

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