A division of the prolific Yousuf Dewan Companies conglomerate, Dewan Sugar Mills Limited (KSE:DWSM) was first set up in 1987. It started off with a sugarcane crushing capacity of 3,500 metric tons per day, which was later expanded to 9,000 metric tons/day. The company's market capitalisation today stands at around Rs 339 million.
Dewan Sugar operates in four segments; sugar, polypropylene, board and panel, and distillery. The polypropylene segment has been un-operative since 2008, evidently due to "blockage of import lines facilities." However, the company's sugar recovery rate has remained formidable and as of FY14 was among the highest in the industry - near 10.2 percent. But like all sugar companies in Pakistan, Dewan Sugar Mills has been suffering due to an adverse business and regulatory environment.
Prior Performance Although net sales have been on an uptrend, Dewan Sugar has seen dwindling profitability over the past five years. The year FY11 was egregiously bad on the back of limited availability of sugarcane due to lower yield and flood. Moreover, this was the year the support price jumped from Rs 100 to Rs 125.
After that, the company has kept its top line moving upward but has struggled with profits; further increases in the support price meant that as of FY14, Dewan's net profits were a paltry Rs 3 million on around Rs 5.6 billion in net sales. The bottom line loss reached Rs 110 million, a 226 percent drop over the preceding year.
The incredibly high support price of sugarcane has left the entire industry unable to compete in international markets. As of FY14, Dewan's exports formed just 9 percent of sugar sales, and here too, the company had to offload its stock with losses.
However, Dewan has done well to rely less on its core business of sugar production and develop its other auxiliary segments - board & panel and distillery. Particularly in the case of distillery, the company has performed remarkably; the firm has brought this segment up from 6 percent of sales in FY10 to around 42 percent as of FY14. Almost all of the distillery segment's sales are exports.
A segment-wise analysis reveals the benefit of this move; the distillery segment has been the only profitable segment of the company for the past three fiscal years. However, its margins have not been too impressive, and for the most recent quarter, its net profits went into the red. The board and panel segment has also been brought up from less than 0.3 percent of sales to over 2 percent, but its profitability is also negative.
Recent Performance The six months ended FY15 were disastrous for Dewan Sugar Mills. A 34 percent year-on-year drop in the top line gave a 228 percent drop in gross profit and 667 percent drop in bottom line. All the company's segments reported losses.
The core business of sugar saw sales decline by 40 percent year-over-year. This was due to lower production by 19 percent as well as lower recovery by around 23 basis points. During the period, the Sindh government raised the support price of sugarcane to Rs 182. Moreover, limited working capital and unavailability of pledge facilities by financial institutions meant that the company had to offload its stock with losses to maintain crushing. Furthermore, any benefit of the export subsidy of Rs 10 per kg does not seem to be reflected in the company accounts, as sugar exports were nil for the six-month period.
The distillery segment's sales were also down by 15 percent year-on-year. Production declined by around 21 percent as the plant ceased to operate due to non-availability of raw material and yearly maintenance. Moreover, ethanol prices were depressed vis-à-vis the fall in petroleum prices. This severely impacted the segment's profitability, yielding net losses for the first time.
The board and panel segment produced around 15 percent more chipboard compared to the prior year. This was due to novel power supply from the company's distillery unit. However, sales were lower by around 42 percent year-on-year.
Outlook Pakistan's sugar industry is mired in a myriad of problems; uncertainty in production owing to climate change, regulation of sugarcane price, huge carryover sugar stocks, no international markets (other than Afghanistan) despite the export subsidy, and the imposition of regulatory duty on export of molasses. However, the government has provided some protection to the local sugar industry by raising the regulatory duty on sugar imports to 25 percent. Nevertheless, the state of affairs is abysmal and most sugar manufacturers are running losses.
For Dewan Sugar Mills, the recent numbers paint a bleak picture. All segments reported losses. On the plus side, the polypropylene segment was expected to start production in the subsequent quarter. But with no change in the regulatory environment on the horizon, the prognosis is negative.
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Rs (Million) 6MFY15 6MFY14 YoY
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Net Sales 2,292 3,482 -34%
Cost of Sales 2,435 3,371 -28%
Gross Profit -142 111 -228%
GP Margin -6% 3% down
900 bps
Administrative & General Expenses 50 42 19%
Distribution & Selling Costs 52 72 -28%
Other Operating Income 3 3 0%
Other Charges 185 - -
Finance Cost 62 53 17%
Profit Before Taxation -488 -53 821%
Taxation 2 10 -80%
Profit After Tax -491 -64 667%
NP Margin -21% -2% down
1900 bps
Earnings per share -11.93 -1.74 586%
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Source: company accounts
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