Siddiqsons Limited - General Rvgchgb,emarks

Cherat Packaging Limited

GENERAL REMARKS1. PURPOSE OF FINANCING PROPOSALThe 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 #1LC SIGHT / LC USANCE

AmountPKR 200 Million

PurposeFor imports / local purchases of specified raw materials and stores & spares.

JustificationCompany 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/PricingLC Opening: 0.15% per quarter / All other charges: As per Schedule of Charges

TenorSight: On Sight / Usance: Max 120 days

RepaymentSight: From companys own sources or through import facilityUsance: From companys own sources

SecuritySame as proposed on page # 2 of the financing proposal

Shariah MON/A

FACILITY #1aMURABAHA (IMPORT) / ISTISNA / SAHAL (SUB-LIMIT)


PurposeTo meet working capital requirements of the company and for retirement of Sight LC documents.

JustificationThe company sales and production is growing continuously. This facility shall enable the company to meet their increasing working capital requirement.

Rate/PricingMatching KIBOR + minimum of 0.70%

TenorMaximum 180 Days

RepaymentFrom companys business cash flows / available WC lines from other banks


Shariah MOShariah 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:MURABAHA1. 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 /RTGS4. 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.ISTISNA1. 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.

FACILITY # 1bLETTER OF GUARANTEE (SUB-LIMIT)


PurposeFor issuance of performance bonds, bid bonds and advance mobilization guarantees favoring Govt./ Semi Govt. /Private Institutions

JustificationTo fulfill customers requirements of servicing its obligations against contracts/bonds.

Rate/PricingAs per Schedule of Charges

TenorMax up to 1 year

RepaymentFrom companys own sources


Shariah MON/A

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

2.2. Security Analysis / Cushion AvailabilityPlease find below the cushion availability analysis.Hypothecated Assets(PKR Mn)(PKR Mn)

Total Stocks as of 31-12-20132,335

Receivables as of 31-12-2013796

Plant and Machinery (P.M.V.) as on 17-05-2013*4,951

Total8,081

Short-term financing Limits4,966

Long-term financing Outstanding395

Total Registered Charge amount5,091

Cushion Amount2,990

Burj Banks Required Charge Amount (Including 25% Margin)900

Available Net Cushion1,090

*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. ExceptionsN/A

3. GROUP PROFILEThe 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:Company NamesNature of BusinesseCIB

Faruque (Pvt.) LimitedShipping AgencyClean eCIB

Greaves Pakistan (Pvt.) LimitedSupplier of Power generation plantClean eCIB

Greaves CNG (Pvt.) LimitedSupplier of CNG plantClean eCIB

Madian Hydro Power LimitedHydro power plantClean eCIB

Cherat Cement Company LimitedManufacturer and distributor of cement

Mirpurkhas Sugar Mills LimitedProducer and distributor of sugar

Greaves Air conditioning (Pvt.) LimitedDistributor of Air-conditioning, refrigeration and heating equipments

Zensoft (Pvt.) LimitedSoftware House

Unicol LimitedManufacturer and supplier of ethanol

4. COMPANY PROFILECherat 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 / SponsorsShareholding structure of the group companies is tabulated as follows:

ShareholdersSHAREHOLDING (%)

Mr. Tariq Rafi66.51%

Mrs. Nighat Tariq15.32%

Mr. Abdur Rahim7.59%

Mr. SajjadAhsan0.03%

Mr. Ibrahim Shamsi0.03%

Others10.53%

TOTAL 100.00%

Directors NameDesignation

Mr. Tariq RafiChairman& CEO

Mr. Abdur RahimExecutive Director

Mr. SajjadAhsanExecutive Director

Mr. Ibrahim ShamsiExecutive Director

Mr. Fazale RabbiExecutive Director

Mr. Muhammad AhmedNon-Executive Director

Mr. Jamal NasirNon-Executive Director

4.2. ManagementNAMEDESIGNATIONQUALIFICATION

Mr. Tariq RafiCEOGraduate

Mr. Abdul Rahim TariqChief Operating OfficerCommerce Graduate

Mr. Mohammad AhmedChief Financial OfficerFCA

Mr. Jamal NasirCommercial DirectorMBA

4.3. Organization StructureThe 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 & ServicesProduct 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.

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 & BuyersOut 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

NAMELOCATIONSELLING TERMS

IMAP Export S.P.A.ItalyCredit (120 days)

OGGI JeansMexicoCredit (90 days)

Ananta Apparels Ltd.BangladeshCredit (120 days)

Argul TextileTurkeyC.A.D. Basis

China TexmatechChinaCredit (90 days)

El Corte InglesSpainCredit (30 days)

Fame JeansU.S.A.C.A.D. Basis

Garmex Saigon JSVeitnamCredit (60 days)

LOCAL SALES


Cotton WebLahoreP.D.C. (90 days)

Artistic GarmentsKarachiAdvance

Digital ApparelKarachiP.D.C. (60 days)

A.A. ExportKarachiP.D.C. (15 days)

A.S. DenimKarachiP.D.C. (15 days)

Paramount SpinningLahoreLC (60 Days)

Grace Apparel (Pvt.) Ltd.KarachiLC (60 Days)

Master Textile LimitedLahoreLC (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 & SuppliersThe 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 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


Indigo Granules WonderfulChinaLC Sight

Jinhe Sodium SulphideChinaLC Sight

PicanolBelgiumLC Sight

Changzhou One WorldChinaAgainst T.T.

OerChikonGermanyLC Sight

LuwaItalyLC Sight

TrutzsChlerGermanyLC Sight

SL has imported Met Coke and Iron Ore from the following suppliers. Details of these transactions are as followsNAMELOCATIONRAW MATERIALLC AMOUNT

Ferrous (Pvt.) Ltd.IndiaMet CokeACU $ 2.96 Million

Glints GlobalU.A.E.Iron OreAED 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& InfrastructureAiming 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 CityDyeing & 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 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 CAPEXSL 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/ RelationsBANKS PKR MnSHORT TERMLONG TERM

FUND BASEDNON-FUND-BASED

Soneri Bank Limited400417-

Habib Metro Bank Limited450750-

Habib Bank Limited400230-

Allied Bank Limited35091-

National Bank of Pakistan300100-

Dubai Islamic Bank Pakistan Limited-450300

Faysal Bank Limited-2895

Bank Al-Falah Limited300200-

Bank of Punjab300200-

Total25002466395

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 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 - TextileThe 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 - TextileJust 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.

Outlook Iron OreIndustry 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 CokeThe 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

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 ANALYSISPeer comparison of SL with Artistic Denim Mills Ltd is as follows,PROFIT & LOSS STATEMENT FOR FY13Amount in PKR 000SIDDIQSONS LIMITED.ARTISTIC DENIM MILLS LIMITED.

Net Sales7,292,2796,136,793

Cost of Sales5,902,9144,991,834

Gross Profit1,389,3651,144,959

Selling & Admin. Exp.466,917249,957

Operating Profit899,964936,745

Financing Cost308,992149,713

Net Profit / (Loss)512,807757,386

BALANCE SHEET AS ON 30-06-2013Amount in PKRSIDDIQSONS LIMITED.ARTISTIC DENIM MILLS LIMITED.

Non-Current Assets7,097,2743,521,263

Current Assets3,732,0272,455,205

Total Assets10,829,3015,976,468

Current Liabilities3,253,6281,701,194

Long Term Liabilities200,605214,559

Equity/Net Worth7,375,0684,060,715

Total Liabilities & Equity10,829,3015,976,468

7. FINANCIAL ANALYSISSalesYear-end (June)20132012

Sales (PKR in Mn)7,2926,028

Growth (%)21.0-4.3

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).

ProfitabilityYear-end (June)20132012

Gross Profit (PKR in Mn)1,389767

GP Margin (%)19.112.7

NP Margin (%)7.07.6

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 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 ASSETSSL 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, residential 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.

LiquidityYear-end (June)20132012

Current Ratio1.191.19

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)20132012

Total Leverage0.50.5

Debt / Net Worth0.030.06

Gearing Ratio0.30.4

DSCR2.82.0

FCCR2.93.5

LeverageSL 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 RatiosYear-end (June)20132012

Days Trade Debtors4747

Days Stocks12089

Days Trade Creditors1618

Cash Cycle151119

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 &MitigantsS #Risk FactorExtent of Risk*Mitigant

1. Business RiskCotton and Yarn prices

Foreign Exchange Risk

Met Coke and Iron Ore Prices

Counterparty Risk

Customer Concentration Risk

Moderate

Low

Moderate

Moderate

Moderate

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.

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

LowImproving sales volumes, healthy profit margin and low leverage and sound capital structure.

3. Management Risk

LowSL is managed by experienced professionals having expertise in textile sector and financial affairs.

4. Security Risk

LowSecurity 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

LowSL 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

8.3. Third Party Check / InformationThird 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 STRATEGYSL 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. RECOMMENDATIONSPakistans 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 SadiqM. Shoaib KhanM. Haris MunawarAdnan AhmedRA CBGRM CBGTL CBG SouthRegional Head Corporate - South

Recommended By

_____________ ___M. R. MirzaGroup Head - CBGPage | 3

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