INDUSTRY RISK ASSESSMENT:

In terms of supply;
 Pakistan is 4th largest producer of the milk therefore there is no shortage of milk
 Livestock is increase at rate of 4%.
 Population of the livestock is also growing.

In demand side;
 Market is saturated with two players dominating market.
 Currently most people prefer open milk as they have questions about the quality of
packaged milk but;
 Recently young population has been preferring packaged milk therefore there has been
sizeable increase in the demand of it. This demand pattern in expected to increase due to
to population and demographics
 Other factors which have impact on the demand are nutritional values and health safety
concerns of the young population.
BUSINESS RISK
Company has single plant which creates problem of Geographical reach; and most of the
company’s efforts are concentrated in northern region. In northern region there are already many
players operating which exposes company to increased market risk.
Apart from that location of company’s plant and livestock is in area where major players are
operating therefore it increases risk of getting biological assets, as in concentrated area getting
new assets become problem as buyers are too many.
MANAGEMENT AND ORGANIZATION
Company’s majority shares are held by one director and his spouse, which increases the agency
problem. Apart from that company’s directors’ information is not conclusive, in next meeting we
should inquire about the directors too.
Moreover the company’s decision to expand the capacity despite underutilizing the capacity at
large needs explanation as to what and how company foresee the increased capacity utilized in
future.
Management uses the gain on fair value for its sales maximization and coverage of operating
costs, it needs to explain how and on what principles they do so.
CAPITAL STRUCTURE
Recently company paid off its long term obligation and its debt is only 6% of its equity, which
indicates that the company has minimum financial risk, also the current liabilities are also only
13% of the total value, and with current ratio 1.81, and there is lesser problem to the liquidity of
the company.
Company has better portion of its current assets to quick ratio which is 1.45, and considering
historical pattern of the company the risk of liquidity are minimum.
With better cash inflow outlook; company has better prospect of meeting short term and long
term obligations, keeping the future demand in highlight; company can make better utilization of
its capacities to generate more cash flows.
Apart from that only 3% of the assets are used to borrow the long term debt which leaves
company with great room for borrowing money on long term basis. Moreover entire liabilities
make up 18% of the total assets.
Company already utilizes guarantee of sister concern Bahera (Pvt) Ltd, therefore company has
larger room for debt financing.
PROFITABILITY AND CASH FLOWS
Company has continuously improved on its cash flows and there has been increase in revenue of
the company on yoy basis, along with it company has also used its cost in better way by
improving its gross margin to 52% of sales in 2019.
Company has also improved on its net income in recent years by reaching at 17% in 2019 from
3% in 2018. With going public and increased capacity company has better prospect of improving
on its revenues and cash generation.
Cash flow from operations have been positive for couple of years which insures meeting of short
term liabilities when required, and cash to current liabilities is 71% it means company can pay
off its major portion of its current liabilities only from cash.
EXTERNAL SUPPORT
As we have witnessed company has better support from its external associates like its CEO has
concerned in other companies even one company has provided guarantee for its borrowing.
EXTERNAL SUPPORT FOR DEBT
Company has under utilized its credit terms with few banks and it means those banks are very
much willing to provide the company finances if required and company has better reputation
with financing institutions.
LONG TERM RATINGS:
Company has potential to gain on its capacities and have enough resoucres to pay off any
ibligation if arises. So my rating would be AA+ for long term