CREDIT RATING REPORT On M/s BHAI BHAI ENTERPRISE

Transcription

1 REPORT: RR/1953/12 Address: CRISL Nakshi Homes (4 th & 5 th Floor) 6/1A, Segunbagicha, Dhaka-1000 Tel: Fax: crisldhk@crislbd.com This is a credit rating report as per the provisions of the Credit Rating Companies Rules CRISL s SME rating is valid upto 365 days (according to tenure of the facilities) from the date of rating declaration. CRISL recognizes the SMEs in accordance with the definition of Bangladesh Bank. The bank exposure of SME will enjoy the same rating assigned to the SME unless otherwise specified. After the above periods, the rating will not carry any validity unless the enterprise goes for rating surveillance. CRISL SME rating mapped with CRISL Short term rating as follows: CRISL-SME1= ST-1 CRISL-SME3= ST-3 CRISL-SME5= ST-5 CRISL-SME2= ST-2 CRISL-SME4= ST-4 CRISL-SME6= ST-6 CRISL followed SME Rating Methodology published in CRISL website Date of Rating December 18, 2012 Rating Type: SME Rating Rating Awarded CRISL- SME3 Outlook Stable Analysts: Khandakar Aminul Islam amin@crislbd.com Mahmudul Hasan mhasan@crislbd.com Entity Rating CRISL-SME 3 Outlook: Stable 1.0 RATIONALE CRISL has assigned CRISL-SME 3 (pronounced as CRISL-SME Three ) rating to M/s. Bhai Bhai Enterprise (BBE) based on its quantitative and qualitative information up to the date of rating. The above rating has been assigned after due consideration of its fundamentals such as experienced proprietor, good business network, good profitability, regular repayment track record etc. However, the above factors are constrained, to some extent, by long inventory holding period, high price volatility of raw material, exposure to operational risk, exposure to environmental compliance risk etc. The SME rating implies that entities rated in this category has adequate capacity to meet its financial obligation; however, risk factors may vary with possible changes in the economy and Govt. policies. CRISL also placed the organization with Stable Outlook considering that its existing fundamentals may remain unchanged in the foreseeable future. M/s Bhai Bhai Enterprise CRISL also placed the organization with Stable Outlook considering that its existing fundamentals may remain unchanged in the foreseeable future. ACTIVITY Brick Manufacturing COMMENCEMENT OF BUSINESS 1994 PROPRIETOR Md. Abu Taher Miah Net worth Tk million Sole Proprietorship business Page 1 of ENTITY PROFILE M/s. Bhai Bhai Enterprise (BBE) is a sole proprietorship business concern, established by Md. Abu Taher Miah. The enterprise is involved in manufacturing and supplying of bricks in the Noakhali district. The proprietor, Md. Abu Taher Miah has business experience of around 24 years. Prior to starting his own brick field he has worked as a 1 st class contractor and supplier. His brick manufacturing and supplying business is in operation for the last 17 years. The bricks are marketed as B.B.M. Star bricks. At present the brick field has a capacity of producing million pieces of bricks per year. The brick field is located at Baliakandi, Bizbag, Senbag, Noakhali. 3.0 OWNER S PROFILE Owner s Name : Al-Haj Abu Taher Mia Father s Name : Late Safiullah Mia Spouse s Name : Zahanara Begum Age : 52 Present Address : Baliakandi, P.O: Bizbag, Senbag, Noakhali Permanent Address : Baliakandi, P.O: Bizbag, Senbag, Noakhali Academic Qualification : Below graduation TIN No : /noa2 Trade License No : 01 National ID No :

2 4.0 OPERATION AND BUSINESS MANAGEMENT 4.1 Procurement The key raw materials required for brick production are soil and coal. Apart from this, brick fields need labor of special expertise that is hired through advance payment. BBE generally procures soil, the main raw material for bricks from different local contractors. Depending upon personal relation and price quotation, the owner himself selects the soil suppliers. Key soil suppliers for the enterprise are Kabir Decorator, F. Rahman Enterprise, Sahabuddin & Sons, Abul Khair & Sons, Jalal Ahmed etc. Coal for the brick field is collected from Sunamgonj, Sylhet from different suppliers namely Ahad Mia, Jalal Uddin & Sons, Yeasin Traders etc. The enterprise does not have any fixed contract with the supplier for different raw material. However, long association and previous good transaction history aids the entity to get the right supplier on time. Good manufacturing facilities Experienced proprietor 4.2 Production Facility The brick field is situated on 8 acres proprietor s owned lands in an open field in Baliakandi, Bizbag, Senbag, Noakhali. Brick manufacturing is a labor intensive process therefore the enterprise appoints different labor group for performing different processes. Those labors are hired from different contractors and a fixed sum of money (Dadon) is provided to them for booking the labor for a season. Thereafter, the labors are paid weekly on pieces rate basis. average the enterprise needs 200 labors to work on daily basis at 80%-90% capacity utilization level. Different team of labor works on different aspect of the manufacturing process like unloading, loading, mixing, shaping, firing, storing etc. Depending upon the nature of soil and the quality of the brick to be produced, the bricks are fired from degree centigrade. The brick field has Zigzag technology in place and the height of the Chimney is 65 feet. 4.3 Business Management The entrepreneur himself is directly involved in the day to day business operation and he has also appointed some employees who assist him in running of the business. Banking affairs, documentation of transaction, buyer and supplier relation are managed by the owner and the appointed staff of the enterprise. 5.0 MARKET OVERVIEW Urbanization, industrialization and standards of living are playing a vital role for the infrastructural development of towns, cities and villages especially in developing countries like Bangladesh. Due to the unavailability of stone aggregate, brick is the main building material for the country s construction industry and most of the houses, buildings and other infrastructural work are done with bricks which comes from the brickfields. The first experimental brickfield in Bangladesh region started in 1840 in Chittagong, while the first commercial brickfield was established in Malinichara of Sylhet district in During 1994 in Rupsha Bazar the first modern brickfield was established. In Bangladesh, there are now more than 9000 brickfields and most of them are in Dhaka, Faridpur, Mymensingh, Gazipur, Narayangong, Comilla, Bogra, Dinajpur, Rangpur, Jessore, Khulna and Chapai Nawabgong, Chittagong etc. Bangladesh is ranked ninth amongst the 30 brick producing and exporting countries in the world. Page 2 of 6 Total production in Bangladesh has been estimated at 15 billion bricks annually. Brick-making is a significant sector in Bangladesh, contributing about 1 percent to the country s GDP and generating employment for more than 1 million people. This industry creates employment opportunity for the poor community of the society as well as plays an important role in our economic growth and national income. Bangladesh exports brick to the following countries:

3 Afghanistan, Australia, Belgium, China, Cyprus, France, Germany, Greece, India, Iran, Japan, Jordan, Kazakhstan, Kenya, Kuwait, KSA, Kyrghistan, Oman, Pakistan, Poland, Russia, Sudan, Switzerland, Taiwan, UAE, UK and USA etc. Half of the produced brick is consumed at home and the rest is exported. Bangladesh earns foreign exchange worth about Tk. 2,000 million every year from exporting bricks. Brick manufacturing is a very important industry as far as Bangladesh s economy is concerned. Not to speak of the export earnings generated by this industry alone, but this industry is very important in respect of the employment it generates. However brickfield companies decide the wage themselves as there is no government rule or directives on what should be the minimum wage and overtime payment policy. 6.0 ANALYTICAL FRAMEWORK As the enterprise does not keep any structured accounting records, CRISL applied its own assumption and estimation to develop the analytical framework. However, proper care has been taken to ensure the correctness of information. As such the financial figures used in performance evaluation process has been estimated to draw reasonable conclusion. 7.0 FINANCIAL PERFORMANCE Average financial performance According to the information provided by the proprietor, the business performance of BBE has been found to be good. The enterprise manufactures approximately lac bricks per year. There is mainly one type of brick BBE sells and the selling price of this brick was Tk in Sales revenue of the concern was Tk mil. in the same period. The prime cost of production includes labor, soil and coal cost. To complete the manufacturing process of a single brick the organization has to spend approximately Tk on labor, Tk on soil and Tk on coal. The administrative cost of the enterprise mainly involves interest cost, salary cost and bad debt. The total administrative cost of the enterprise remains at Tk per brick. Finally, total cost for per piece of brick stands approximately at Tk while the profit 2.30 per brick. Therefore the total cost to revenue for the enterprise stood at around 71%. At the end of the cycle the enterprise arrives at a net profit margin of around 29% which is standard in the context of comparative manual brick field in the industry. 8.0 FINANCIAL STRENGTH Equity based enterprise The overall financial position of the enterprise has been found to be good and as on September 30, 2012 it was as follows: (Figure Tk. In million) Particulars Amount Current Asset 21.5 Less. Current Liability Net Current Asset 5.70 Add. Fixed Asset Net Assets/ Net Worth As on September 30, 2012 the enterprise had around 0.63 mil. pieces of brick valuing at Tk mil, 3 tractor of soil valuing Tk mil. and Tk million receivable totaling to Tk mil. of total current asset. However on the other hand the enterprise had payable of Tk. 2.8 mil. and bank loan outstanding of Tk mil. totaling to Tk mil. of current liabilities as on September 30, The enterprise has 8 acres of owned land on the brick field site with a current market value of Tk mil, one office building about 10,000 sft valuing Tk Mil, another office building of around 2800 sft valuing at around Tk mil, machines valuing at tk mil totaling to Tk mil. Currently the net worth of the enterprise stands at Tk mil. Page 3 of LIQUIDITY AND FUND FLOW

4 Moderate liquidity BBE has been operating with moderate liquidity. The enterprise has to maintain a significant level of inventory due to its business nature and requires substantial fund to finance it. an average it keeps stock of raw material and finished goods amounting to Tk mil. the other hand, the sales are done 90% on cash basis and the rest on 30 to 40 days credit. Cash conversion cycle of the enterprise varies between days. Till now the entity has been supporting its working capital through bank finance. As on September 30, 2012 the total current assets of the enterprise stood at TK mil. (approx.), whereas total current liabilities stood at TK mil. (approx.) CREDIBILITY AND BANKING RELATIONSHIP Regular repayment history 10.1 Liability Position BBE has been maintaining banking relationship with Islami Bank Bangladesh Limited since The enterprise is enjoying working capital facilities from Islami Bank Ltd. in Bai- Murabaha mode and maintaining regular repayment history. The Bai-Murabaha limit was Tk mil and outstanding was Tk mil. as on September 30, Against the above outstanding balance the enterprise has sufficient stock and receivables to meet the liabilities. The value of stock position of the enterprise stood at Tk mil. and receivable at Tk mil. against the liability of Tk mil. as on September 30, Security Arrangement Against Bank Exposure The entity has offered following security packages against above exposure of Islami Bank Bangladesh Limited: I. Primary: Lien on goods to be released under T.R. till disposal & deposit of sale proceeds towards adjustment of the related investment account with the branch. TR to be obtained duly executed along with delivery order duly signed by the investment client. II. Collaterals: decimal land with structure which has total face value around mil. and proposed machinery with current market value mil. So total security arrangement is around mil. III. Others: a) Personal guarantee(s) of: the client, proprietors sisters concerns, the mortgagor(s) b) A/C payee crossed post-dated cheque(s) from the client favoring bank drawn on the current account of the client maintained with bank, covering the entire sale price. c) In the event of client s failure to adjust Bank s dues in time or if the cheque(s) are dishonored, on due dates you will take appropriate legal action against the client with prior permission from Head Office RISK ANALYSIS BBE is exposed to some risks by virtue of its business nature and the industry dynamics. CRISL reviewed the risk aspects of the enterprise which are given below: Exposed to price fluctuation risk Page 4 of Raw Material Supply Risk BBE usually procures soil, coal and sand (viti bali) during the peak period via different contractors. Because of high demand in the peak season, there is usually a scarcity of the brick manufacturing material; therefore the risk of raw material supply is high. However the owner has built up good relationship with the contractors as such are capable of procuring raw material in the shortage period Price Fluctuation Risk The raw material price for brick manufacturing fluctuates throughout the year. Due to the fluctuating nature of the raw material associated with the production process of brick, the enterprise is exposed to price fluctuation risk Operational Risk

5 Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The overall operation of brick manufacturing depends on manual labor. Also there is much scope for stock loss due to bad weather or rainy condition as the main raw material of brick manufacturing- soil is usually piled in the production field, which could be subject to damage due to wetness or rain. In view of the above, the entity is exposed to operational risk Interest Rate Risk The enterprise enjoys bank finance for working capital management. Due to unstable money market, interest cost of bank loan is very high and has already crossed past records, which exposes the enterprise to interest rate risk Succession Risk Though the owner is actively engaged in managing the business operation, the successor (child) of the owner is still minor and yet to get involved in the existing businesses. In this regard, CRISL views a moderate succession risk for the enterprise Political Instability The business of the enterprise is highly dependent on supplying bricks to the local market. Most of the time local market supply highly depends on political power and support. the other hand, movement of transport again depends on political stability and purchasing power of people in general along with other macro-economic fundaments. As the political situation of the country is always volatile, this might create negative impact on the revenue generation of the enterprise. Exposed to regulatory risk 11.7 Regulatory Risk A brick field requires various permission from different bodies of government like environmental authority, fire brigade etc. Although BBE has NOC from the commissioner of Customs, NOC from department of environment, license from department of environment but still its regulatory risk is high due to frequent changes of government legislation from time to time. the other hand due to environmental friendliness the government carries positive impression towards the manufacture and use of ceramic brick. Thus the regulatory risk associated to the enterprise is very high OBSERVATION SUMMARY Rating Comforts: Experienced proprietor Good Profitability Equity based enterprise Regular repayment history Good business network Adequate security arrangement Business Prospects: Capacity utilization to the estimated level Expansion in related business Introducing diversified product line Participating in export market Rating Concerns: Long inventory holding period High price volatility of the raw material Exposed to operational risk Exposed to succession risk Weak legal status Unstructured books of Accounting Exposed environmental compliance risk Business Challenges: Availability of substitute products Negative impact on environment Regulatory pressure in the industry Maintenance of market position END OF THE REPORT Page 5 of 6 (Information used herein is obtained from sources believed to be accurate and reliable. However, CRISL 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. Rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. All rights of this report are reserved by CRISL. Contents may be used by news media and researchers with due acknowledgement)

6 [We have examined, prepared, finalized and issued this report without compromising with the matters of any conflict of interest. We have also complied with all the requirements, policy procedures of the SEC rules as prescribed by the Securities and Exchange Commission.] CRISL SME Rating Scales "CRISL six point rating scale for SME has been designed considering the short term risk profile of the enterprise in view of the inherent enterprise structure thus is equivalent with short term rating scale of CRISL" Rating Scale CRISL-SME1 (Highest Safety) Rating Description Highest Credit Quality. An SME rated in this category has a very strong capacity to meet its financial commitments. Risk factors are negligible and almost risk free. CRISL-SME2 (High Safety) CRISL-SME3 (Adequate Safety) CRISL-SME4 (Average Safety) CRISL-SME5 (Inadequate Safety) High Credit Quality. An SME rated in this category has strong capacity to meet its financial commitments but may vary slightly from time to time because of economic conditions and change in the Govt. policies. Adequate Credit Quality. An SME rated in this category has adequate capacity to meet its financial obligation; however, risk factors may vary with possible changes in the economy and Govt. policies. Average Credit Quality. An SME rated in this category has average capacity to meet its financial obligation. However, adverse economic conditions or changing circumstances could impair the obligor s capacity to meet its financial commitments. Inadequate Credit Quality An SME rated in this category has inadequate capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely to impair the obligor s capacity to meet its financial commitments. CRISL-SME6 (Default) Highly Inadequate Credit Quality The SME in this category is already in default/ Likely to be in default. For the rating categories CRISL-SME2 through to CRISL-SME5 the sign of + (plus) or (minus) may be appended to the rating symbols to indicate their relative position within the rating categories concerns Page 6 of 6