Shakarganj Limited (PSX: SML) is the flagship company of the Shakarganj group, and one of the oldest sugar mills in the country. Established in 1967, it was the fourth mill incorporated in Punjab province. The company is mainly concentrated in manufacture of sugar and allied products such as ethanol-based biofuel, biopower (bagasse-based), and particle board manufacturing (building materials). In addition, it also has a textile division for production of yarn bags, and own farms.
Shakarganj Limited holds a controlling interest in Shakarganj Food Products Limited, which is a leading producer of dairy and fruit juices.
Pattern of shareholding
The pattern of shareholding reveals that the majority of SML shares are with various Crescent Group companies, with highest number of shares held with Crescent Steel at 22 percent. In toto, Crescent group undertakings hold 36.5 percent voting rights in the company. This is followed by Mahmood group, which holds 9.5 percent shares through its undertaking Roomi Fabrics. Directors of the company hold a cumulative share of 5.3 percent.
The pattern of shareholding section in the latest financials does not give a breakup of any significant shareholder, individual or corporate, holding significant share of five or more percent.
Past performance
Shakarganj Limited has been in troubled waters for past six years. While the operations are primarily dependent on sugar milling, the company derives its profitability from manufacture and export of biofuel or ethanol.
In 2013, when global oil prices took a turn for the worse, the company closed its operations for better part of marketing year. This resulted in high losses, forcing the management to enter restructuring of long-term finance and injection of subordinated loan-cum-equity from sponsor directors.
Revenue from ethanol (biofuel) business declined from a peak of Rs 5.2 billion in MY12 to a little under Rs 540 million by MY16, or one-tenth. Poor outlook of oil prices during this time forced the firm to ramp down sugar production, raw material for bioethanol. Sugar production declined from a peak of 173,620 tons in MY12, to just 45,707 tons by MY16.
This in turn also affected availability of bagasse, raw material for manufacturing of particle board - mainstay of company's building materials division.
To make matters worse, sucrose recovery rate also remained below industry average by 45bps during the past six years, rendering its white sugar operations uncompetitive relative to the industry. Problems were further magnified in MY13 by the onset of floods in Jhang district, home to its sugar and ethanol divisions. This further constrained supply of sugarcane.
Fortunes of the company further suffered due to the slowdown witnessed in country's textile division in the PML-N era. The fixed exchange rate constrained demand for Pakistani manufactured textiles in the global market, with textile division sales witnessing a freefall from a peak of Rs 1.9 billion in MY13 to just Rs 755 million by MY16.
Accumulated losses during this period also wiped out sponsor capital in the business, forcing the company to rely on surplus on revaluation of fixed assets and conversion of director's loan into equity to reflect a positive equity figure.
Between MY12 and MY16, company's five-year sales CAGR stood at a negative 20 percent. As a result, bottom-line remained in red between MY14 and MY16.
Recent performance
The company received a welcome break from the downslide in MY17, as oil prices bottomed-out and began inching upwards. Further optimism came on the back of bumper sugarcane crop touching ever highest 75.5 million tons in MY17 (and subsequently 84 million tons in MY18).
As a result, the company ramped up sugarcane crushing, clocking in ever highest 1.5 million tons, to produce 144,460 tons of white sugar at a recovery rate of 9.77 percent. Note that the crushing and sugar production levels noted were more than three times witnessed in the previous year MY16.
While the company was able to amp up its top line, it struggled to regain margins seen in MY12. Ethanol business barely managed to post gross profit, whereas white sugar prices remained weak in domestic market due to bumper crop, while government remained unwilling to enhance export quota to take off excess sugar stock from the market.
This resulted in a build-up of inventory, as stocks rose from Rs 347 million at the beginning of MY16 to over Rs 1 billion by year end.
As the company was still eyeing a rebound in selling prices especially of biofuel, it delayed offloading stock and instead decided to wind back cane crushing in the following year. However, the company continued biofuel manufacturing, on the back of stable oil price outlook which rose 57 million liters, levels not seen since MY14.
Nevertheless, the year remained difficult as white sugar prices stayed on the downlow in the domestic market. Piling inventory carrying costs from the previous year forced company's hand, forcing it to offload inventory in the domestic market at prevailing prices. Unfortunately, for the company, the government eventually announced a subsidy on sugar export to the tune of Rs 10.7 per kg, which the company was able to avail only marginally.
In contrast, other firms in the sector that availed the subsidy saw a year of record profitability, receiving further support form the rupee devaluation and resulting gains on exchange rate conversion. In comparison, margins came under pressure for Shakarganj, which once again increased reliance on biofuel export. The business finally saw a recovery in fortunes, as revenues from the division crossed Rs 3 billion, levels last seen in MY14.
Other business divisions noted a mediocre performance. Textile division, which manufactures yarn bags, saw a modest recovery of Rs 100 million, closing near Rs 900 million.
Whereas contribution from particle board manufacturing remained marginal as cane crushing had remained constrained.
The mixed bag of performance resulted in top line declining by more than one-third compared to previous year, however, margins received support on the back of recovery of demand for biofuel in the export market, ending the year with a gross margin of 7.3 percent, which is 156bps higher compared to MY17.
The gains on the gross level, however, were more than wiped out as distribution costs also increased due to increased marketing efforts for exports. Core operating margin came in at just 0.68 percent, barely in green. Other income helped pull EBIT a little up but came on the back of adjustments for expenses no longer needed (software consultancy services). Ex of adjustments, EBIT would have also recorded a loss.
Financial leverage increased as the company took out fresh long-term loan on the back of partial repayment to NBP of restructured facility. This comes at a bad time as policy rates have reached an inflection point and are back on the rise. As a result, finance cost increased to Rs 200 million, further dragging PBT into red.
Were it not for company's strategic investment in Shakarganj Foods, manufacturer of dairy and juice products, company's losses from core operations would have long ago led to its demise. For the year under review, these came in at Rs 266 million, allowing the company to nearly erase losses and close in at a net loss of just Rs 14 million after tax.
Outlook
The ongoing year is expected to bring in a mixed bag of performance for Shakarganj. On one hand, debt servicing cost has reached a high of average 12 percent and is expected to rise even further. In contrast, sugar prices in domestic market have begun to show signs of recovery and are expected to bring some respite to core operations. Similarly, ethanol business will receive benefit from exchange rate devaluation of nearly 50 percent. Profits from equity investment however are expected to remain constrained on the back of slowdown in economic activity and consumer spending.
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Shakarganj Limited
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Rs (mn) MY18 MY17 YoY
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Sales 7,404 11,360 -35%
Cost of Sales (6,862) (10,704) -36%
Gross Profit 543 656 -17%
Administrative expenses (275) (282) -3%
Distribution Costs (217) (161) 35%
Profit from core operations 51 212 -76%
Other income 91 143 -36%
Other expenses (49) (31) 61%
Earnings before interest & taxes 93 324 -71%
Finance income/(cost) (200) (170) 18%
Share of profit from equity investment 266 195 36%
Profit before tax 158 350 -55%
Taxation Reversal/(liability) (172) (139) 24%
Net profit for the period (14) 211 -107%
EPS (Rs) (0.11) 1.80
GP margin 7.33% 5.77% + ve 156bps
Operating margin 0.68% 1.87% - ve 119 bps
EBIT margin 1.25% 2.86% - ve 160 bps
PBT margin 2.14% 3.08% - ve 94 bps
NPT margin -0.19% 1.86% - ve 204 bps
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Source: Company accounts
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Pattern of Shareholding (as on September 30, 2018)
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Categories of Shareholders %
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Associate Undertakings 48.1%
Directors & their dependents 5.3%
NIT & ICP 5.7%
Others (companies) 21.3%
Banks, DFIs, NBFIs, Insurance Co., 0.7%
Mudarabas, & Pension Funds
General Public 19.0%
Total 100.0%
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Source: Company accounts
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