JDWS: prodigal son returns bearing gifts

A ten times increase in before-tax profits, and an EBIDTA margin highest in nearly a decade – the prodigal son of the sugar sector (PSX: JDWS) has made a grand return to profitability. For the investors discouraged by the harsh media coverage faced by the sponsors during the past year, let there be no doubt how bountiful the price spiral has been for the industry giant.

A year has gone by since the tales of low raw material availability and exorbitant rates paid for sugarcane began to do rounds. The Director’s Review claims that the company paid Rs 214 per 40kg on average to growers during the MY20 season (Oct 2019 – Sep 2020), which is 19 percent higher than rate paid last year. But clearly, the increase in national average retail price of sugar by over a quarter more than compensated for the inflated costs, returning GP margin to double-digits territory.

So, are the tough times over? Although many insist that the company has never really seen hard times, the fact is that it remains highly levered. On the positive side, it appears that JDWS has reprofiled Rs 7bn (out of Rs 16bn) of its short-term debt, improving its liquidity situation. The company has taken full advantage of the refinancing facilities offered by the SBP and lower pricing offered by commercial banks, thanks to monetary expansion/low discount rate.

Of course, MY20 was not a year of expansion – least for sponsors of a company ridden with debt and media scrutiny. However, the optics have certainly improved since the negotiations on tariff terms revision were successful with the IPPs committee and an MoU was signed for the company’s two bagasse-based power plants. But what does the future hold?

By raising the disclaimer that sugarcane is not available at rates less than Rs 300 per 40kg, the management has beaten the war drums for the MY21 season. Even as it concedes that the crop is at least 10 percent higher than last year, no explanation is offered as to why growers are able to extract an exorbitant purchase price in a bumper crop season.

If the current sentiment persists, expect a reversal in profitability margins as the industry will find it hard to maintain average selling price of sugar at last year’s in the domestic market, with no prospects of exports re-opening. Inventory carrying costs will remain low in all likelihood, considering that financing cost is expected to remain stable in light of the forward guidance offered by SBP on near term discount rate.

The year of pandemic was kind to the sugar industry’s financials, never mind the hyperbole surrounding the inquiry report. 2021, however, may turn out to be drastically different especially given claims of low sucrose recovery and high procurement price. Caution is warranted..