Cherat Packaging Limited

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GENERAL REMARKS
1. PURPOSE OF FINANCING PROPOSAL
The purpose of this Financing Proposal is to seek approval for financing facilities to the tune of PKR 200
million for Cherat Packaging Ltd. (referred to as the company or CPL).
2. FACILITY& TRANSACTION STRUCTURE

FACILITY #1 LC SIGHT / LC USANCE
Amount PKR 200 Million
Purpose For imports / local purchases of specified raw materials and stores & spares.
Justification Company has been fulfilling majority of its raw material requirements through imports,
and companys imports has increased on year-on-year basis. LC Sight facility is to
support the growing requirements of the company.
Rate/Pricing LC Opening: 0.15% per quarter / All other charges: As per Schedule of Charges
Tenor Sight: On Sight / Usance: Max 120 days
Repayment Sight: From companys own sources or through import facility
Usance: From companys own sources
Security Same as proposed on page # 2 of the financing proposal
Shariah MO N/A


FACILITY #1a MURABAHA (IMPORT) / ISTISNA / SAHAL (SUB-LIMIT)
Amount PKR 200 Million
Purpose To meet working capital requirements of the company and for retirement of Sight LC
documents.
Justification The company sales and production is growing continuously. This facility shall enable the
company to meet their increasing working capital requirement.
Rate/Pricing Matching KIBOR + minimum of 0.70%
Tenor Maximum 180 Days
Repayment From companys business cash flows / available WC lines from other banks
Security Same as proposed on page # 2 of the financing proposal
Shariah MO Shariah Modus Operandi (MO) is in process of approval and will be obtained prior to
final financing approval, however, proposed Shariah MO for CPL will have the following
features:
MURABAHA
1. CPL will Order Burj to purchase raw materials etc.
2. Burj will Instruct CPL to purchase raw materials etc. as an agent of Burj.
3. Burj will make advance payment in any of following modes:
a. PO/DD in favor of supplier / Credit the customer account /RTGS
4. CPL will provide declaration verifying the date of receiving/ non-consumption
of raw materials etc.
5. Offer / acceptance.
6. Advance in Murabaha will be converted to Financing in max. 15 days.
ISTISNA
1. CPL will provide a Written Offer to Burj for manufacturing of goods.
2. Burj will make advance payment to CPL for manufacturing.
3. CPL will manufacture the goods and ask Burj for taking possession.
4. Burj will provide a Goods Receiving Note.
5. Advance in Istisna will be converted to Financing in max. 45 working days.
6. Burj will issue a Notice to CPL for sale of manufactured goods.
7. CPL will provide copies of invoices etc. as evidence of sale.
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FACILITY # 1b LETTER OF GUARANTEE (SUB-LIMIT)
Amount PKR 25 Million
Purpose For issuance of performance bonds, bid bonds and advance mobilization guarantees
favoring Govt./ Semi Govt. /Private Institutions
Justification To fulfill customers requirements of servicing its obligations against contracts/bonds.
Rate/Pricing As per Schedule of Charges
Tenor Max up to 1 year
Repayment From companys own sources
Security Same as proposed on page # 2 of the financing proposal
Shariah MO N/A

2.1. Ways out Analysis
Principal Source: Principal source for repayment is companys own financial sources including but not limited
to cash flows
Secondary Source: Second source of repayment is financing and working capital limits available from other
financial institutions
Tertiary Source: Tertiary source of repayment is the recovery through sale of hypothecated stocks of the
company.

2.2. Security Analysis / Cushion Availability
Please find below the cushion availability analysis.
Hypothecated Assets (PKR Mn) (PKR Mn)
Total Stocks as of 31-12-2013

2,335
Receivables as of 31-12-2013

796
Plant and Machinery (P.M.V.) as on 17-05-2013*

4,951
Total

8,081
Short-term financing Limits 4,966
Long-term financing Outstanding 395
Total Registered Charge amount

5,091
Cushion Amount

2,990
Burj Banks Required Charge Amount (Including 25% Margin)

900
Available Net Cushion

1,090

*Valuation has been done by M/s Sadruddin Associates (Pvt.) Ltd. which is not only a PBA approved valuator
but also on Burj Banks panel.


2.3. Deferral / Waiver Requested
Initial disbursement of the working capital facilities to be allowed against Ranking Charge which will be
upgraded to First Pari Passu status within 120 days from the date of first drawdown.

2.4. Exceptions
N/A

3. GROUP PROFILE
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The group has diversified business interests in the country that give strength to the groups operations. The
group is involved in Sugar, Ethanol, Cement, Paper Bags, Power Generation, Air Conditioners, Generators and
Software Engineering Sectors.
The details of the group companies are as follows:



4. COMPANY PROFILE
Cherat Packaging Limited (the Company) was incorporated in Pakistan as a public company limited by shares in
the year 1989. Its main business activity is manufacturing, marketing and sale of paper sacks and
polypropylene bags. The Company is listed on Karachi and Lahore Stock Exchanges. The registered office of the
Company is situated at 1st Floor, Betani Arcade, Jamrud Road, Peshawar, Pakistan.

CPL is one of the largest producer and supplier of paper bags to the cement industry. Besides, CPL also
produced paper sacks, and has recently launched its Polypropylene line to cater to diversify its customer base
and also supply its products to sugar and chemicals industry. The company had an installed capacity of 265
Million bags, which was has been increased to 370 Million bags after installation of the PP plant.

4.1. Directors / Shareholders / Sponsors
Shareholding structure of the group companies is tabulated as follows:




















Company Names Nature of Business eCIB
Faruque (Pvt.) Limited Shipping Agency Clean eCIB
Greaves Pakistan (Pvt.) Limited Supplier of Power generation plant Clean eCIB
Greaves CNG (Pvt.) Limited Supplier of CNG plant Clean eCIB
Madian Hydro Power Limited Hydro power plant Clean eCIB
Cherat Cement Company Limited Manufacturer and distributor of cement
Mirpurkhas Sugar Mills Limited Producer and distributor of sugar
Greaves Air conditioning (Pvt.)
Limited
Distributor of Air-conditioning, refrigeration and
heating equipments

Zensoft (Pvt.) Limited Software House
Unicol Limited Manufacturer and supplier of ethanol
Shareholders SHAREHOLDING (%)
Mr. Tariq Rafi 66.51%
Mrs. Nighat Tariq 15.32%
Mr. Abdur Rahim 7.59%
Mr. SajjadAhsan 0.03%
Mr. Ibrahim Shamsi 0.03%
Others 10.53%
TOTAL 100.00%
Directors Name Designation
Mr. Tariq Rafi Chairman& CEO
Mr. Abdur Rahim Executive Director
Mr. SajjadAhsan Executive Director
Mr. Ibrahim Shamsi Executive Director
Mr. Fazale Rabbi Executive Director
Mr. Muhammad Ahmed Non-Executive Director
Mr. Jamal Nasir Non-Executive Director
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4.2. Management
NAME DESIGNATION QUALIFICATION
Mr. Tariq Rafi
CEO Graduate
Mr. Abdul Rahim Tariq
Chief Operating Officer Commerce Graduate
Mr. Mohammad Ahmed
Chief Financial Officer FCA
Mr. Jamal Nasir
Commercial Director MBA

4.3. Organization Structure
The key decision maker is Mr. Tariq Rafi (Chairman) along with his son Mr. Abdul Rahim Tariq. He joined the
family business in 1968 and independently established a small textile spinning (Siddiqsons Spinning Mills Pvt
Ltd) & weaving mills (Siddiqsons Weaving Mills Pvt Ltd) in SITE, Karachi. He subsequently pioneered in
introduction of denim (1986-87) and tinplate (1999) in the country. Mr. Tariq Rafi was presented with the
coveted civil award Sitara-e-Imtiaz by his Excellency President of Pakistan and is the director on board of
MCB Bank (by virtue of 10.9% direct and indirect shareholding). Besides Mr. Rafi and his son, the company has
a balanced set of Executive and Non-Executive directors who are well qualified and are in mid of their careers.
Moreover, the company has developed system of hierarchy in management and chain of command that
ensures automatic replacement of every key position on immediate basis. This system endorses that the
company is dependent on robustness of system instead of individuals.
4.4. Products & Services
Product palette is segmented in the following categories,
TEXTILE:
Basic denim, stretch denim, chambray denim, tencel denim, cross hatch, ring denim, panama denim & canvas
denim. The company enjoys quality assurance of OEKO Tex Standard 100 and ISO-9001 certifications. It has set-
up a garments unit with a capacity of 800 jeans per day and a state-of-art washing plant. Jeans are exported to
Levi Strauss & Co., VF Corporation, GAP, Calvin Klein, Jones Apparel, K-mart and a host of smaller brands in U.S.
and E.C.C.

DEFENSE:
Bullet Proof jackets, Ruck Sack Bags, Chest Rigs, Pistol Holsters, Water Proof canvas tents and Army Belts and
Webbing



TRADING:
During 1HFY2014, the company started bidding for the tenders of Pakistan Steel Mills (PSM) for the supply of
Met Coke and Iron Ore. The met coke and iron ore is mainly imported from India and UAE. The shipments are
unloaded at Iron Ore and Coal (IOC) Jetty, Port Bin Qasim Karachi and are transported through conveyor belts
from port to PSM stock yards. They supply these essential items to PSM on deferred payment basis with terms
ranging from 45-60 days from the date of delivery of goods. They usually keep around 10-15% margin over the
supply of Iron Ore and Met Coke to PSM.

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Pakistan Steel Mills (PSM) always has emergent needs for the procurement of met coke and iron ore to run its
operations. Met coke is melted in blast furnace for extraction of iron which is then converted into steel. To
produce heat for melting, met coke is required which is produced from coal. Hence, for production of met
coke, coking coal is essential which are not available in Pakistan. Similarly, iron ore available in Pakistan is of
inferior quality which can be used after blending it with some good imported iron ore. Hence, PSM has to
improve coal and iron essentially for its production. At its full capacity, PSM requires around 1.8 million tons of
iron ore and around 1.2 million tons of coal. Hence, at least two ships per month of coal of about 50,000 tons
each are required when production is to be maintained at full capacity.

4.5. Sales & Buyers
Out of the SLs total sales, export sales are approx. 80% of the total sales. While local sales are made on cash,
exports are made on credit against both contracts and LCs. Almost 30% exports are made against sight
contracts of collection basis of 60 days, the remaining 70% against Usance LCs (80% 120 days, 20% other
tenors) with these bills usually getting discounted.
Yarn constitutes only 5% of its total turnover, with 95% coming from sale of fabric. Of this, approx. 30% comes
from local sales to local garment manufacturers and the rest through exports. Major exports are made to E.C.
countries and Turkey and a small portion to Bangladesh.
Their major buyers of their textile / denim products are as follows:
EXPORT SALES
NAME LOCATION SELLING TERMS
IMAP Export S.P.A. Italy Credit (120 days)
OGGI Jeans Mexico Credit (90 days)
Ananta Apparels Ltd. Bangladesh Credit (120 days)
Argul Textile Turkey C.A.D. Basis
China Texmatech China Credit (90 days)
El Corte Ingles Spain Credit (30 days)
Fame Jeans U.S.A. C.A.D. Basis
Garmex Saigon JS Veitnam Credit (60 days)

LOCAL SALES
NAME LOCATION SELLING TERMS
Cotton Web Lahore P.D.C. (90 days)
Artistic Garments Karachi Advance
Digital Apparel Karachi P.D.C. (60 days)
A.A. Export Karachi P.D.C. (15 days)
A.S. Denim Karachi P.D.C. (15 days)
Paramount Spinning Lahore LC (60 Days)
Grace Apparel (Pvt.) Ltd. Karachi LC (60 Days)
Master Textile Limited Lahore LC (60 Days)

For their supplies of Met Cock and Iron Ore to Pakistan Steel Mills (PSM); they allow credit period of 45-60 days
to PSML.

4.6. Resources & Suppliers
The company consumes between 40-45K bales of raw cotton p.a. with around 50% locally procured and the
rest imported (mainly USA and Brazil). Local cotton is purchased on both cash and credit from local ginners
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including Asif Ali Cotton, Al Noor Cotton Factory, Muhammadi Cotton, Kohinoor Cotton and Baba Fareed
Cotton.
Most of the yarn produced (7/s, 9/s, and 10/s) is consumed internally for specialized fabrics and denim.
Moreover the company procures approx. 20% of its yarn from local spinning players like Nishat Mills and Indus
Dyeing & Manufacturing Co. Ltd. The customer buys dyes and colors from China mostly on sight LC basis; a
small portion of the purchase is on Usance LC of 60 days. Their major foreign suppliers for chemical, dyes,
stores and spares, plant & machinery are as follows:
IMPORTS
NAME LOCATION SELLING TERMS
Indigo Granules Wonderful China LC Sight
Jinhe Sodium Sulphide China LC Sight
Picanol Belgium LC Sight
Changzhou One World China Against T.T.
OerChikon Germany LC Sight
Luwa Italy LC Sight
TrutzsChler Germany LC Sight

SL has imported Met Coke and Iron Ore from the following suppliers. Details of these transactions are as
follows
NAME LOCATION RAW MATERIAL LC AMOUNT
Ferrous (Pvt.) Ltd. India Met Coke ACU $ 2.96 Million
Glints Global U.A.E. Iron Ore AED 8.75 Million

HUMAN RESOURCES: Companys workforce strength includes 1,300 employees of which 150 are permanent,
the remaining are hired on contractual basis, when the need for additional staff arises.

4.7. Plant Capacity& Infrastructure
Aiming to realize efficiencies, the company in 2004-5 opted for a centralized set-up and created Denim City in
Hub over 50 acres of land (additional land was bought adjacent to its spinning mills). DenimCity has 02 spinning
mills with 1,944 rotors and 25,540 spindles and a weaving and finishing mill with 96 Gammax looms and 135 air
jet looms and a rope dyeing machine. Additionally the company has numerous warping, sizing, and stenter
machines. The company also operates from its original denim unit (D-53, SITE) which has 76 looms and ancillary
equipment.
SL operates from 5 units in SITE Area (D-53, A-33, B-26, B29 and F-205) and 01 large unit (Denim City) in Hub
Industrial Estate, Baluchistan:
Spinning Housing 25,540 spindles and 1,944 rotors in Hub with a complete back-process, the spinning unit
can produce 48 million lbs of yarn p.a. Over 80% of yarn (cotton yarn, poly/cotton yarn, denim yarn, slub yarn,
core/lycra yarn, etc.) is consumed internally.
Weaving Currently, there are 245 shuttle-less air jet looms (Picanol, Ruter, Vamatex, Suzuler&Getamax) with
a capacity to produce over 40 million meters of fabric p.a. A large portion of looms and ancillary machines are
located in the DenimCity.
Warping- The company has 5 warping machines (McQuire USA) at Denim City
Dyeing & Finishing This unit has the similar capacity as that of weaving unit. Three different technologies are
being currently used for yarn dyeing namely (a) rope dyeing, (b) slasher dyeing and (c) looptex dyeing. Denim
fabrics range from tencil denim to Cool Max to Organic cotton.
Garment & Washing Garments unit is located at A33, SITE (adjacent to Head Office D53 SITE). It is equipped
with 550 single and double needle Juki stitching machines with a rated capacity of 3.6 million garments p.a.
Moreover the unit has an Italian (Miano, Italy) washing plant with wide ranging capabilities such as robotic
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splasher spray, fabric creasing, sandblasting, etc. Customers have the option to create their own design using
advanced technologies. Resultantly leading names like Levis, Tommy Hilfiger, etc. have come on board.
FUTURE CAPEX
SL plans to do further BMR on its spinning and weaving plants amounting to PKR 80 Million. To increase
capacity, they will install looms amounting to PKR 100 Million and for power generation, SL plans to purchase
generators amounting to PKR 120 Million.
4.8. Existing Banking & Financing Arrangements/ Relations













5. INDUSTRY ANALYSIS
Denim industry like any other textile and clothing products is largely fragmented. While the westerners were
the major producers of denim in yester years, now Asian manufacturers are contributing to about 50 percent of
the world denim capacity. Most of the production in Asia is generated primarily in China and India. Some of the
capacity expansion is taking place in the countries like Bangladesh, Indonesia, Pakistan and Turkey. Since the
companies are shaping up their products vis--vis defined consumer segments, they obviously are investing
heavily on fit, style and fashion statements.

Pakistan textile sector is considered a vital sector of the economy. The entire value chain represents production
of cotton, ginning, spinning, weaving, dyeing, printing and finally garments manufacturing. Due to these reasons
it is a protected from the government allowing for relaxed policies in view of the significant leverage possessed
by leaders. At present Pakistan is the 8th largest exporter of textile products in Asia. This sector contributes
9.5% to the GDP and provides employment to about 15 million people or roughly 30% of the 49 million
workforce of the country. Pakistan is the 4th largest producer of cotton with the third largest spinning capacity
in Asia after China and India, and contributes 5% to the global spinning capacity.

For Pakistan which was one of the leading producers of cotton in the world, the development of a textile
Industry making full use of its abundant resources of cotton has been a priority area towards industrialization.
At present, there are 1,221 ginning units, 442 spinning units, 124 large spinning units and 425 small units which
produce textile products.Even with so many advantages, Pakistans total share in global textile trade is less than
1%. Cotton prices have relatively reduced from an average of PKR 5,831/- maund in 2011-2012 to PKR 5,788/-
maund in 2012-2013.
Spinning Industry:
Spinning is the process of converting fibres in to yarn. This is the first process of value chain that adds value to
cotton, converting ginned cotton into cotton yarns. If spinning industry produces sub-standard yarn, its effect
goes right across the entire value chain. Spinning is the most capital-intensive stage in the textile value chain
primarily due to an elaborate back process (mixing, blow-room, carding, drawing, combing and simplex) and
thus has the most significant barriers to entry. An economically viable spinning unit requires 20K spindles and
BANKS PKR Mn
SHORT TERM
LONG TERM
FUND BASED
NON-FUND-
BASED
Soneri Bank Limited 400 417 -
Habib Metro Bank Limited 450 750 -
Habib Bank Limited 400 230 -
Allied Bank Limited 350 91 -
National Bank of Pakistan 300 100 -
Dubai Islamic Bank Pakistan Limited - 450 300
Faysal Bank Limited - 28 95
Bank Al-Falah Limited 300 200 -
Bank of Punjab 300 200 -
Total 2500 2466 395
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investment of PKR 650-700 million. With an increase in competition and a greater emphasis on scale, this
minimum investment threshold is likely to increase. The capital requirement will also be impacted by the
increase demand for specialized and high quality yarn which requires newer technology.

Weaving
In Weaving, two distinct sets of yarns or threads are interlaced to form a fabric or cloth. The threads which run
lengthways are called the warp and the threads which run across from side to side are the weft or filling.

The weaving activity is organized as integrated weaving units, independent weaving units and power loom units.
Shuttle less looms in the integrated and independent weaving sectors both have benefitted from substantial
investment, resulting in phenomenal growth in the last two decades. However, this sector is producing
comparatively low value added grey cloth of inferior quality that must undergo additional processing to become
usable in the production cycle. The greatest capacity lies in the power looms sector even though the sector
faces operational hurdles that revolve around poor technology, scarcity of quality yarn and lack of institutional
financing for its development from unorganized to an organized sector.

Performance in 2013 - Textile
The outgoing year 2013 has brought good news for the textile sector owing to the rise in exports and the much-
awaited GSP Plus status granted by the European Union just before the close of the year. With strong
fundamentals like stable cotton prices, depreciation of the rupee against the dollar and relatively better gas
supply to industries, textile exports rebounded strongly in 2013. Pakistan exported textile products worth $13.1
billion in fiscal year 2012-13 (FY13), which is 53% of Pakistans total exports of $24.6 billion. The exports were
higher than FY12 ($12.35 billion) but they were still below the figure of FY11 when the country made record
high textile exports of $13.78 billion due to high cotton prices in the world market.

Future Outlook - Textile
Just as the textile sector was regaining strength to hit another record, the news of Pakistan attaining the
Generalised System of Preferences (GSP) Plus status from the EU gave an added boost to the sentiments of
investors in the country.Under the GSP Plus, Pakistan will be able to export various products, including textile, to
the EU at concessionary duties from January 1, 2014 to the end of 2017 the year when the EU will review its
trade concessions for another seven years.With better access to the EU market, according to JS Global Research,
Pakistan is expected to achieve $14.5 billion of exports by the end of FY14. The brokerage house believes the
country will see continuous growth in exports, which will touch $15.95 billion in FY15.

Despite the energy crisis, textile exports in the first five months (July-November 2013) of the current fiscal year
showed an increase of 6%. Industry officials and analysts predict further increase in the remaining seven
months (December-June) because of the duty-free or low duty access to the 28-nation EU bloc. Aptma the
largest lobbying group of textile millers in Pakistan believes the country will succeed in adding at least $1
billion to textile exports every year until 2017. However, industry officials continue to demand better energy
supplies to achieve their export targets.

In recent years, Pakistans yarn exports to China have increased sharply which has supported the overall textile
exports. Better market access to the EU is expected to boost the exports of finished textile products that will
benefit big textile groups who have prior networking in Europe. The growth in exports has already provided a
strong platform to the textile sector to outperform other sectors on the Karachi Stock Exchange (KSE).According
to a sample of Topline Securities, based on selected textile firms (55 companies) including spinners, weavers
and composites, the textile sector gave a whopping return of 94% versus the benchmark KSE-100 index return
of 49% in FY13. Profits of these listed textile firms increased by 150% to Rs30.6 billion in FY13 compared to just
Rs12.3 billion in FY12.
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Outlook Iron Ore
Industry sources report that anticipation of a revival in underlying
steel demand in China is keeping prices from a significant slide,
despite negative macro developments.Price support is set to
persist in the short-term given expectations of stronger buy-side
activity for iron ore, as steel demand strengthens into Q2 after a
seasonal lull.(Source http://www.crugroup.com/)

Price trend of Iron Ore (US Dollars per Dry Metric Ton) for last 5 years is given below:


Source: http://www.indexmundi.com/

Outlook Metallurgical Coke
The global benchmark metallurgical coke spot prices have bottomed out in 2013 Q3. Since a nadir of $230/t,
FOB China in July, international metallurgical coke prices have risen, largely thanks to improving Chinese
domestic market conditions, combined with a modest uptick in coking coal prices during the period. It is
expected that the prices to continue to move away from this low point, albeit at a very slow pace initially.'

Since lows during the global financial crisis, metallurgical coke
prices have been on a rollercoaster ride. A spectacular
recovery was seen immediately after in 2010 and 2011, and
thereafter prices entered a continuous decline for around 18
months between mid-2011 and end-2012. Rises came on the
back of soaring prices for coking coal and a significant
tightening in the merchant coke supply/demand balance as
global hot metal production returned to record highs.

However, more recently, key import markets have struggled to keep up the pace of recovery growth, in
particular, Europe's appetite for international coke has deteriorated significantly, and India has become the key
international importer, particularly from the spot market. India imports Met Coke primarily from Russia,
Ukraine, Vietnam, Poland and Columbia.India will continue to remain one of the largest markets for coke. Given
the following advantages make India an exporter of Met Coke:

Rapidly growing merchant coke producer
Adoption of quick to build non recovery, heat recovery ovens
In between Atlantic and Pacific markets
Has already sold coke to Brazil, Japan, SE Asian and European countries
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At the opening of 2013, the 40% tax on metallurgical coke exports from China was removed, opening the door
for supply from here to enter the already oversaturated market. Whilst we are yet to see the full effects of this
development on the export market, participants are now questioning how prices will evolve, given the presence
of low cost Chinese supply, through the near and medium term. (Source http://www.crugroup.com/)

6. PEER ANALYSIS
Peer comparison of SL with Artistic Denim Mills Ltd is as follows,
PROFIT & LOSS STATEMENT FOR FY13
Amount in PKR 000 SIDDIQSONS LIMITED. ARTISTIC DENIM MILLS LIMITED.
Net Sales 7,292,279 6,136,793
Cost of Sales 5,902,914 4,991,834
Gross Profit 1,389,365 1,144,959
Selling & Admin. Exp. 466,917 249,957
Operating Profit 899,964 936,745
Financing Cost 308,992 149,713
Net Profit / (Loss) 512,807 757,386

BALANCE SHEET AS ON 30-06-2013
Amount in PKR SIDDIQSONS LIMITED. ARTISTIC DENIM MILLS LIMITED.
Non-Current Assets 7,097,274 3,521,263
Current Assets 3,732,027 2,455,205
Total Assets 10,829,301 5,976,468
Current Liabilities 3,253,628 1,701,194
Long Term Liabilities 200,605 214,559
Equity/Net Worth 7,375,068 4,060,715
Total Liabilities & Equity 10,829,301 5,976,468

7. FINANCIAL ANALYSIS
Sales
Sales have increased by 21.0% on YoY basis in FY13, due to increase in
local sales by 8.4%. Export sales increased by 24.1% mainly due to
appreciation of USD against PKR. Exchange gain of FY13 turned out to
be PKR 47 Mn as compared to PKR 48 Mn in FY12. The increase in sales is majorly due to the increase in prices
of finished goods, since the company has improved the quality of their products.

Out of the total sales, export sales are approx. 80% of the total sales. Exports sales are mainly directed towards
Turkey, E.C. countries, and U.S.A., whereas local sales are realized against small to medium size garment
companies (classified as indirect exporters).


Profitability
Gross profit earned during the year amounted to PKR 1,389 Mn
as against PKR 767 Mn during the previous year. Cost of raw
cotton has remained stable throughout the year; however, other
costs like yarn and fabrics, electricity etc have increased on the
Year-end (June) 2013 2012
Sales (PKR in Mn) 7,292 6,028
Growth (%) 21.0 -4.3
Year-end (June) 2013 2012
Gross Profit (PKR in Mn) 1,389 767
GP Margin (%) 19.1 12.7
NP Margin (%) 7.0 7.6
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back of inflationary pressure. Notwithstanding, the increase in costs, gross margins have improved for the year
from 12.7% in FY12 to 19.1% in FY13. The increase in costs was observed in yarn by PKR 184 Mn, fabrics by PKR
298 Mn, salaries, wages and benefits by PKR 232 Mn and electricity, water and gas by PKR 58 Mn.

Finance costs have increased in FY13 to PKR 309 Mn as compared to PKR 219 Mn in FY12 due to an increase in
short-term borrowings during the year. Short-term borrowings increased from PKR 1,885 Mn in FY12 to PKR
2,187 Mn in FY13. However, long-term borrowings have decreased from PKR 197 Mn in FY12 to PKR 95 Mn in
FY13. SL has been regularly making payments of the long-term debt as per repayment schedule.

Due to increased sales in FY13 and a trickledown effect of higher gross profit, net profit of the company turned
out to be PKR 513 Mn in FY13. Also, the company experienced increase in other expenses including provision
for bad debts amounting to PKR 111 Mn which resulted in net profit margin of 7% in FY13 which is slightly
lower than last years net profit margin of 7.6%.

OTHER NON-OPERATING FIXED ASSETS
SL has made investments in 3 different projects under Joint Ventures. Joint Venture I have 70% of
investment from SL amounting to PKR 673 Million, the property is located at Clifton, and the project is in
the process of being launched. Joint Venture II and Joint Venture III are in association with Army Welfare
Trust to construct multi storey buildings comprising of commercial, resident ial and serviced apartments.
SLs share in both joint ventures is 30% each and amounts to a total of PKR 400 Million. As a substantial
volume of long-term investment is in non-operating investments, hence, Return on Assets is lower at
4.7%. However, the projects are envisioned as strategic projects with long-term gain / benefits.

The company has also made long-term investments in listed equity securities at carrying value of PKR
3,345.57 Million in FY13. A decrease / increase of 5% on the KSE market index would have an impact of
approximately PKR 167.28 Million on the income of SL , depending on whether or not the decline is
significant and prolonged.

Liquidity
Current ratio in FY13 remained the same as of FY12. Both, current
assets and current liabilities increased by equal proportion
resulting in an unchanged current ratio.
Current assets of the company increased by approx. PKR 646 Mn. Sales for FY13 improved; therefore accounts
receivables have increased by 21%. With higher sales for the year, company procured more raw material and
increased production of finished goods. Inventory for the same reason remained high at the end of FY13.
Current liabilities of the company have increased due to higher trade payables in FY13 as compared to FY12.
During the year, company procured more raw materials which resulted in higher trade payables in FY13.
Further, short-term borrowings have increased from PKR 1,885 Mn in FY12 to PKR 2,187 Mn in FY13. Short-
term borrowings have increased in FY13 as company availed funds under ERF against export sales.



Year-end (June) 2013 2012
Current Ratio 1.19 1.19
Year-end (June) 2013 2012
Total Leverage 0.5 0.5
Debt / Net Worth 0.03 0.06
Gearing Ratio 0.3 0.4
Cherat Packaging Limited

Page | 12

Leverage
SL is quite low leveraged, which is evident from Total
Leverage and gearing ratios.
Long-term debt of the company has reduced as the company is making timely payments. Long-term
financing under SBP LTFF scheme was availed to finance import of plant and machinery. Current portion
of Long-Term Financeshas remained the same in FY13 as compared to FY12 and it is expected that
company will settle its long-term debt by FY15.
Almost all the components of total net worth have remained unchanged except for retained earnings
and investment revaluation reserve. Retained earnings have increased from PKR 2,783 Mn in FY12 to
PKR 3,296 Mn in FY13 and investment revaluation reserve has increased from PKR 422 Mn in FY12 to
PKR 1,609 Mn in FY13.
However, leverage ratio has decreased slightly to 0.46x in FY13 from 0.52x in FY12 and gearing ratio
decreased from 0.06x in FY12 to 0.03x in FY13 due to the decrease in long-term financing during the year.
Moreover, due to the increase in profitability as explained above, the Finance Cost Coverage Ratio has
increased.

Asset Coverage Cycle / Efficiency Ratios
The cash cycle for FY13 is 151 days which has increased
from 119 days in FY12 due to the increase in inventory
turnover, specifically due to a increase in the stock of
finished goods by 64.2%. SL continues to have a shorter
turnover for trade creditors, and stability in days trade
debtors. This number of days is average for the textile
industry.

8. SAFETY ASSESSMENT

8.1. Risks &Mitigants
S # Risk Factor Extent of Risk* Mitigant
1. Business Risk
Cotton and Yarn
prices












Foreign Exchange
Risk




Moderate













Low





SL is vertically integrated textile composite unit ranging
from spinning, weaving, dyeing, washing and stitching and
thus has the ability to absorb / control any temporary
adverse fluctuation in raw material costs.

The average cost of procurement for SL was PKR 5500-6000
per maund, whereas current prices are still above 6,000 per
maund. Moreover, denim is a value added product sold on
a premium hence easier for SL to mitigate the risk posed by
unforeseen decline in prices. It is imperative to note that
cotton prices have varied according to the different
qualities, with the decline in prices being relevant only for
low quality cotton not being used by SL

SL is hedged against foreign exchange risk of PKR
depreciation against USD, as their exports volume of PKR
5.01 Billion is twice of their imports volume of PKR 2.45
Billion.

DSCR 2.8 2.0
FCCR 2.9 3.5
Year-end (June) 2013 2012
Days Trade Debtors 47 47
Days Stocks 120 89
Days Trade Creditors 16 18
Cash Cycle 151 119
Cherat Packaging Limited

Page | 13

Met Coke and Iron
Ore Prices







Counterparty Risk
















Customer
Concentration Risk








Moderate








Moderate
















Moderate








The sale price is locked in PKR value at the time of
execution of contract with PSM for the supply of met
coke/iron ore. In case the international price decreases in
USD or AED value at the time of opening of LC, the
difference in prices is an exchange gain for SL. However, if
the prices increase in USD or AED value, the difference is an
exchange loss for SL. However, SL usually sells to PSM at a
margin of 10-15%

As per the approved tender, PSM have to make the
payment to SL within 45-60 days of the delivery of the
goods, whereas, the Usance LC Payment terms ranges from
90 - 120 days, which mitigates the cash flow timings and
repayment risk to a great extent. Although PSM is
financially in a bad shape. However, given the strategic
importance of PSM and to avoid its technical closure (a
stage when the mills cannot be revived they have to keep
their furnaces and batteries alive through continuous
supply of basic raw material (coal/iron ore/met coke).
Given this very peculiar situation PSM cannot afford to
default on the payments of these essential raw materials
and being State Owned Enterprise (SOE) the GoP will
always come forward to rescue PSM. As per SL they are
getting regular payments from PSM through sales of its
products in the market.

SLs products are well-recognized by Levis due to which the
companys orders to Levis increase every year. Additionally,
many local garment finishing companies have been
directed by Levis to procure garment from SL. Nonetheless,
SL enjoys a diversified customer base with reliance on Levis
limited to only 22%; other regular customers include big
names such as GAP, Tommy Hilfiger and VF corporation.
Furthermore, all value-added textiles have access to
subsidized SBP financing to support their cost saving
against competition risk from other countries
2. Financial Risk

Low Improving sales volumes, healthy profit margin and low
leverage and sound capital structure.
3. Management Risk

Low SL is managed by experienced professionals having
expertise in textile sector and financial affairs.
4. Security Risk

Low Security arrangement is in line with the financing facility
offered by other banks. Ample security cushion is worked
out under relevant section in the proposal.
5. Succession Risk

Low SL is an unlisted public limited company, with a strong
management team and a good succession plan in place for
their management team.
* High; Moderate or Low

8.2. Critical Success Factors
SL is one of the oldest and largest players in the textile denim sector with a satisfactory market reputation
and credibility.
Professional Management team.
Experienced Sponsors
Sound financial position with consistent stream of cash flows.
Satisfactory repayment history with the banks
Cherat Packaging Limited

Page | 14


8.3. Third Party Check / Information
Third party check was conducted with Bank of Punjab, Habib Metro Bank Limited, Faysal Bank Limited, National
Bank of Pakistan, Allied Bank Limited, Soneri Bank Limited, Habib Bank Limited and Bank Alfalah Limited
verbally as well as formal market check letters were also sent to these banks. As per our verbal market check,
the banks have given a satisfactory opinion in terms of SLs repayment track record and overall conduct of the
account. Further, eCIBs of the company and group companies are clean without any
restructuring/rescheduling/write-offs during the last 5 years.
9. RELATIONSHIP STRATEGY
SL is an established name with presence in the textile market for over 20 years having a sizeable market share.
We have proposed working capital lines in the form of LC Sight/Usance limit of PKR 675 Million which will
subsequently be settled through own sources. Further, the customer would also be able to utilize the
Murabaha, Istisna and Sahal facility to meet any urgent working capital requirementsand to manufacture and
sell finished goods.

For 2014, we expect to fetch trade business of PKR 800 Million (imports plus guarantees) from SL with an
expected yield of around 3.9%. (Please see attached Account Profitability Report).
Going forward, we would try to identify and capture the cross sell opportunities like offering Export Refinance
IERS limits, cash management solutions and companys provident fund deposits at market competitive rates.
Given the facility pricing, the relationship would be a good source of income and trade business for the bank.

10. RECOMMENDATIONS
Pakistans textile industry ranks amongst the top in the world. Pakistan is World's fourth largest cotton
producer and the third largest consumer of the same. The textile sector enjoys a pivotal position in the exports
of Pakistan. In Asia, Pakistan is the 8th largest exporter of textile products. It contributes significantly to the
countrys GDP, exports as well as employment. It is, in fact, the backbone of the Pakistani economy. SL is an
experienced company within the textile industry.

Keeping in view the above due diligence / risk analysis and the proposed security structure, the financing
facility is being proposed for approval.

Proposed By




______________________________________________ _______________________________________________________ ____________________________________________________________________ __________________________________________________________________________________________
Najia Sadiq M. Shoaib Khan M. Haris Munawar Adnan Ahmed
RA CBG RM CBG TL CBG South Regional Head Corporate - South


Recommended By




_____________ ___
M. R. Mirza
Group Head - CBG