Shahtaj Sugar Mills Limited

Shahtaj Sugar Mills Limited (SHJS: KAR) was incorporated in Pakistan on March 27, 1965 as a public limited company under the Companies Ordinance with a registered office situated in Karachi. The company is listed on Karachi and Lahore Stock Exchanges since 1972 and is engaged in the manufacture of sugar from sugarcane.
The mill is situated in the district of Mandi Bahauddin in the province of Punjab. It went into commercial production in November 1968. Original plant and machinery of the manufacturing unit was imported from Italy.
With a crushing capacity of 1,500 TCD (crushing metric tons per day) on double-carbonation, double-sulphitation (DCDS) process. This was later expanded to 4,000 tons per day and the process was also changed to Defection Remelt Phosphitation (DRP). The company completed another major BMR-cum-expansion program in 1996, aiming to double the capacity of the plant to remain one of the leading sugar mills of Pakistan. Present rated crushing capacity of the mill is 7,650TCD based on 160 days cycle.
Due to good performance, the company was given top company award by Karachi Stock Exchange three times in 1982, 1984 & 1988.
Shahtaj is managed by a competent and experienced board of directors with seven independent directors out of ten. Company also fully complies with all International Accounting Standard as applicable in Pakistan. M/s. Ernst & Young Ford, Rohdes, Sidat Hyder & Company are the auditors of the company since its inception.
Pattern of shareholding
The directors of the company, along with their dependents, represent the single largest shareholding among any of the shareholding groups of the company. The company belongs to the Shahtaj Group and sponsors of the group Mahmood Nawaz and Muneer Nawaz along with their spouses own approximately 4 million shares of the company, which adds up to 25 percent share in the company. The figures quoted are as per MY18 financials.
Other significant holdings are held by JS Growth Fund, NIT, and State Life, all of which hold between 5 to 10 percent share in the company. Associated undertaking, Shezan Services (Pvt.) Limited own 2.38 percent. Put together, non-sponsor institutional investors own 32.06 percent of the company, whereas disclosed sponsor shareholder comes out at close to 45 percent.
However, of the 23.22 percent held with the general public, it is possible that sponsor family may also constitute a percentage of the same, to add to a majority control of voting rights on the board.
Historical performance
In MY17, Shahtaj had its best sales turnover since inception on the back of record crushing, production, and highest ever recovery levels. Since MY12, this was the only time when sucrose recovery levels for the company exceeded national average.
During that year, aggregate sugarcane crushing was higher by 60 percent, and total sugar production increased by 32 percent due to extended season of 134 days compared to 97 days, over MY16.
A cursory look at Shahtaj's operating segments confirms that the company has been earning most of its money from sugar production as byproducts of sugar such as molasses, bagasse, and press mud contribute less than 10 percent of gross sales.
Recent performance
During the year, price of sugarcane as set by provinces recorded no change over the previous year. The harvest season began (October 2017) with an opening stock of close to 2.5 million tons, highest ever in country history, and close to 46 percent of total domestic demand.
This delayed sugarcane procurement, as mills were sitting on massive inventories. Opening inventory for MY18 for Shahtaj, for example had increased by five-fold the previous year.
As a result, the company delayed crushing, which began in earnest at the beginning of December, and lasted only till mid-March 2018.
During the period, crushing was lower by 18 percent compared to same period last year, as the company continued to struggle to offload existing stock.
It appears that the company was unable to take advantage of the subsidy on freight export announced by the government during the year under review. While other mills recorded significant profits, Shahtaj, which did not rely on government support to stay afloat, instead recorded losses.
As a result, sugar production was lower by 21.6 percent compared to previous year. The difference between crushing and sugar output delta is explained by sucrose content recovery level, which was lower by 41bps over the previous year.
Nevertheless, despite lower production, it appears that the company was eventually able to offload most of its stock, as year-end inventory balance was reduced by more than half.
Disclosures made in the related-party transaction section note that the company recorded up to Rs811 million in sale of sugar to M/s Shezan International, an FMCG company and manufacturer of flagship Shezan brand beverages.
This is close to 16 percent of net top line and does not represent significant concentration of single-customer risk.
However, it is further noted that the company sold sugar to Shezan Int. at ex-GST rate of Rs46.2 per kilo. Assuming arms-length principle was maintained, and the price is used as an average rate for all other sugar sales made during the year, back of the envelope calculation suggest the company sold nearly 97,000 tons of sugar, all domestically during the period under review.
With the price of sugarcane fixed by the provinces at exorbitantly high rates, the sugar industry has been suffering and a lot of sugar mills are in the red. Shahtaj is a midsize unit which has recorded undistinguished performance historically.
Apart from a pause in MY17, the company's financial performance posted a subdued performance from MY13 - MY18 on account of lower than industry rate of sucrose recovery.
Outlook
The crushing season has begun with a delay of two months, in first week of December 2018. As notified support price in Sindh and Punjab have remained unchanged at Rs182 and Rs180 per 40 kg respectively, crop size is expected to be 25 percent lower than last year.
So far, the federal government has not announced any subsidy on export quota of 1.1 million tons, due to which export during 1QMY19 remained very low at just 70,614 tons. However, some respite in export is expected as the government of Punjab has announced a subsidy of Rs5 per kg of export.
It remains to be seen whether Shahtaj will take advantage of the opportunity and post a turnaround in performance.

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SHAHTAJ SUGAR MILLS LIMITED

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Rs (mn)                           MY18      MY17          YoY

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Sales                            4,878     5,807         -16%

Cost of Sales                   (5,010)   (5,147)         -3%

Gross Profit                      (132)      660        -120%

Administrative expenses           (233)     (243)

Distribution Costs                 (12)      (13)

Other operating expenses            (4)      (24)        -82%

Profit from operations            (381)       380       -200%

Other income                        17         7

Share of profit in associates        8         9

Finance cost                       (56)      (75)        -25%

Profit before tax                 (411)      322        -228%

Taxation                             2      (179)

Net profit for the period         (409)      143        -386%

EPS (Rs)                        (34.04)    11.90

GP margin                        -2.70%    11.36%   -14.06 pp

Operating margin                 -7.81%     6.54%   -14.35 pp

PBT margin                       -8.43%     5.54%   -13.97 pp

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Source: Company accounts

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Pattern of Shareholding (as at September 30, 2018)

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Categories of Shareholders                                  %

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Associated Undertakings & Related Parties

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Shezan Services (Private) Limited                        2.4%

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Modaraba & Mutual Funds

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MC FSL-Trustee JS Growth Fund                            9.4%

Directors & their dependants                            42.3%

Executives                                               0.0%

Public Sector Companies & Corporations                  13.0%

Investments, Insurance Companies & NIT                   9.6%

General Public-Local                                    23.2%

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Total                                                  100.0%

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