Press Release

JCR-VIS Assigns Initial Ratings to Shakarganj Food Products Limited

Karachi, March 20, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A-/A-2’ (Single A-Minus/A-Two) to Shakarganj Food Products Limited (SFPL). JCR-VIS has also assigned preliminary rating of ‘A’ (Single A) to the proposed Sukuk issue. Outlook on the assigned ratings is ‘Stable’. The instrument rating will be finalized upon review of the signed legal documents.

The ratings assigned to SFPL take into account company’s sustained business growth, sound liquidity profile and adequate debt coverages. Ratings also derive strength from strong sponsor profile of the company comprising renowned business concerns including Sharkarganj Limited, BankIslami Pakistan Limited (BIPL) and Crescent Steel and Allied Products Limited. Business risk is considered moderate on account of increasingly competitive operating environment leading to pressure on margins. Moreover, industry margins remain sensitive to regulatory changes in taxes and duties: the company has witnessed a decline in gross margin during FY17 owing to imposition of sales tax and custom duties on raw material.

SFPL operates two business divisions; dairy and juice, with former comprising more than 95% of gross sales. Product portfolio of the company include plain and flavored UHT milk, tea whiteners, UHT cream, desi ghee, fruit concentrates and juices. Over the last three years, net sales of the company have grown at a CAGR of 22% mainly on account of consistently higher volumetric sales. Revenue from tea whitener comprises around two-third of gross sales, which is considered to be on a higher side. Despite higher revenue sales, net profit stood lower during FY17 on account of decline in margins.

The management is projecting continuing increase in sales volume primarily on the back of capacity expansion. While benefitting from its existing experience in pulp manufacturing and juice industry, the company also intends to enhance its focus on ‘Juices, Nectar and Still Drinks - JNSD’ division, thereby augmenting its product slate. The future direction of ratings will depend on the timely attainment of financial projections.

Liquidity profile of the company is considered adequate on account of sufficient cash flows in relation to outstanding debt and effective cash cycle. With equity expansion through profit retention and periodic repayment of long-term debt, improving trend has been witnessed in gearing and leverage indicators. However, the same are expected to increase on account of planned funding to be availed for capacity expansion. Recently, the board of directors has approved a right share issue of Rs. 700m during the ongoing year, in order to rationalize its capital structure.

SFPL intends to issue rated, privately placed and secured, diminishing musharakah Sukuk of amount upto Rs. 1.0b (inclusive of a Rs. 300m green shoe option) to part finance the planned capex of around Rs. 1.7b. Tenor of the Sukuk will be 6 years including 1-year grace period. Principal will be repaid in 20 quarterly installments starting from 15th month from the date of issuance, whereas profit rate will be 3-month KIBOR + a premium per annum. The instrument will be secured by first pari pasu charge over all present and future moveable fixed assets of the company with 25% margin. Moreover, the company will maintain a Debt Service Account (DSA) with accounts bank, which will be held under exclusive lien of investment agent/trustee (for the benefit of the sukuk investors). The company shall ensure that during each month (and in any case not later than the fifteenth (15th) day of each month), it shall deposit the amount equivalent to the 1/3rd of the upcoming installment amount (principal + profit/rental) into DSA so that the aggregate amount in the DSA on the due date is equal to the installment amount of the relevant period due for payment.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.



Javed Callea

Advisor
Applicable rating criterion: Industrial Corporate (May, 2016)
http://jcrvis.com.pk/docs/Corporate-Methodology-201605.pdf

Notching the Issue (June, 2016)
http://jcrvis.com.pk/docs/criteria_instrument_16.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2018 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .