Faran Sugar Mills Limited

Faran Sugar Mills Limited (FRSM) was incorporated in Pakistan on November 03rd, 1981. It is a public limited company operating under the Companies Act, 1913. The company is listed on the Pakistan Stock Exchange.
The principal activities of the company include production and sale of white sugar; the company also earns from disposal of molasses, which is a byproduct of sugarcane crushing. The registered office of the company is situated in the provincial capital Karachi whereas manufacturing facilities are located in Sheikh Bhirkio, Tando Mohammad Khan district, Sindh province.
Timeline of the Group
Faran Sugar Mills is a group entity of Bawany group, a major Sindh-based Memon business family. Faran Sugar Mills is held by Amin Bawany side of the family, which is also engaged in other industries such as insurance through Reliance Insurance, modaraba through BF Modaraba, particle board manufacturing, ethanol production, trading and construction sectors.
Bawany family's business history starts in 1897 by Ahmed Ebrahim Bawany in Kathiawar region of British India. The family branched out to Rangoon in Burma to enter textile and hosiery trading. By 1930, the family had set up its first PLC by the name of Ahmed Violin Hosiery Works (Burma) Limited, which became the largest hosiery factory in Asia.
During World War II, the group shifted its business back to Kathiawar, India and setup units for ceramics, salt, tanning hosiery. Well-known brands from that period include Kathiawar Industries, Dilawar Syndicate, and Bawany Hosiery Works. Post-partition, the family set up over 15 industrial units in West Pakistan, which were divided into Bawany and Amin Bawany groups in 1996.
Timeline of the Company
The company was setup in 1981 and began commercial operations in 1983 with a production capacity of 2,000 tons crushing per day. In 1984, the company was listed on Karachi and stock exchanges under the symbol FRSM, and continues to be listed under the same. Current market capitalisation of the firm stands at over Rs1.7 billion, which is 1.1 times its book value.
Over the last 25 years of operations, production capacity was increased regularly in line with growing domestic demand and global absorbing capacity. With gradual increases of 2,700TCD in 1988 to an additional 1,000TCD in the following two years, by early 1994, production capacity stood at 6,500TCD.
Capacity addition came to a grinding halt in the following 10 years and de-zoning of sugar mills led to a mushroom growth of mills across the country, generating surplus capacity at national level. However, in 2004, the company performed de-bottle necking exercise, which led to increase by another 1,000TCD. Current capacity stands at 9,000TCD as a result of BMR activities undertaken five years ago.
Early on, the company used to export molasses in its raw form; however, realising the export potential of value-added products in this line, the company set up a distillery by the name of Unicol Limited with the help of two other sugar mill groups, Mehran and Mirpurkhas Sugar Mills Limited.
Unicol Limited has been in operations for the last 10 years and produces ethanol from sugarcane molasses. The company also set up Faran Power Limited in 2016, a bagasse based captive power unit which intends to supply power to HESCO. Faran Power has not reach COD yet.
Other investments include Uni Energy Limited and Uni Foods Industries, both of which are a joint venture with its partners Mehran and Mirpurkhas Sugar mill groups. Uni Foods began commercial operations last year and has been setup as an FMCG, whereas Uni Energy is a wind power unit. Profit from Unicol (the molasses based distillery) helps buttress companies bottom-line during financially adverse periods.
Sugar division performance
MY17 proved to be a difficult period as supply glut resulting from over cultivation and carryover stock from last marketing year led to decline in ex-factory and retail prices of sugar. Recall that while retail price of processed white sugar is not regulated, raw material prices are carefully controlled by the government through support price mechanism, which is set up by the provinces to support farming community.
At a time of low international sugar prices, the support price of sugarcane is artificially held high. Back of the envelope calculation suggests that based on support price of Rs180 per 40 kilos of sugarcane, raw sugarcane constitutes about 80 percent of cost of sales for the company.
As domestic prices of white sugar remain subdued, the company recorded very poor financial performance this year. Faran Sugar Mills had to crushed highest-ever 993,389 tons of sugarcane, and yet was still not able to achieve break-even, resulting in cost of sales exceeding top-line for the year.
During the period under review, Faran Sugar Mills operated for a total of 138 days, up from 104 days of sugarcane crushing during last year's operation. The crushing of sugarcane commenced on November 14 and lasted for over four months. During the period, the mill increased crushing volume by 26 percent on the back of bumper cane crop in northern part of Sindh. Based on number of days operated, crushing capacity stood at 1.25 million metric tons; however, capacity utilisation only stands at 80 percent. This indicates slight improvement over capacity utilisation of 63 percent posted last year.
The production of sugar also increased to 106,319 MT particularly due to higher volume of crushing, an improvement of 22.5 percent over previous year. The recovery declined to 10.70 percent as against 11 percent achieved last year. For the crushing period 2017-18, government of Sindh notified support cane price of Rs.182 per forty kg of cane, which was same as last crushing season's price.
The industry continued to seek government support to decrease procurement rate, however, due to election year and farming vote's pressure, support price remained intact at 2016 level, despite a glut in local and international market.
Financial analysis
Note that as the country has been producing surplus sugar for past couple of years, as per PSMA sources the country had a carryover stock of 2.5 million metric tons as it entered crushing season in Jan 2017. Despite a glut of sugar in global commodity market, price of end product is left on the mercy of market forces whereas price of raw material is dictated by the government, and strongly favors the supplier (farmers) due to underlying political considerations.
However, despite total allowed export of 925,000 tons during, which has resulted in depressed domestic prices of end product, companies' revenue declined considerably at 32 percent. Proceeds from exports allowed the company to maintain some semblance, as proceeds from exports accounted for close to 20 percent of top-line. However, increased focus on exports from nil last year led to a whopping increase in distribution costs, which grew close to 2.5 times over last year. Sugarcane price set by the provincial government did not receive a revision since the previous marketing year, remaining at Rs180 per maund.
The slump in top-line cascaded downwards, resulting in a loss at a gross level, due to cost of raw sugarcane exceeding total sales in value for the year. Profits from equity investments in Unicol allowed the company to minimize losses, however, both operating and PBT margins dropped down by 11 and 13 percentage points, one of the highest losses in the industry.
Outlook
Once again, the country is looking at a surplus of sugar and the federal government has recently allowed export of sugar up to 225,000MT without any export subsidy, which was valid until 31st March 2018. Since global sugar prices have plummeted, review of quarterly accounts of major sugar players indicate that the industry is expected to perform poorly in the financial year ended September 30, 2018.
Sources say if the support price is not revised down substantially during the year, millers could outright refuse purchase during the next marketing year.

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Faran Sugar Mills Limited

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Rs (mn)                            MY17      MY16     YoY

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Sales                             4,436     6,530    -32%

Cost of Sales                   (4,533)   (5,842)    -22%

Gross Profit                       (97)       687   -114%

Administrative expenses           (120)     (124)     -4%

Distribution Costs                 (35)      (10)    242%

Other expenses                     (11)      (39)    -71%

Other income                        135        17    696%

Profit from operations            (128)       530   -124%

Finance cost                      (141)      (38)    270%

Share in profit from investments     90       116    -22%

Profit before tax                 (178)       609   -129%

Taxation                            (5)     (126)    -96%

Net profit for the period         (184)       483   -138%

Earnings per share (Rs)          (7.36)     19.30

GP margin                        -2.19%    10.53%   -13pp

Operating margin                 -2.88%     8.12%   -11pp

PBT margin                       -4.02%     9.32%   -13pp

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