Mehran Sugar Mills Limited

Mehran Sugar Mills Limited (PSX: MRNS) was set up in 1965 as a public limited company under the repealed Companies Act, 1913. The company manufactures and sells sugar and its by-products.

Shareholding pattern

As at September 30, 2021, close to 95 percent shares are held in the “individuals” category, followed by almost four percent in joint stock companies. Further breakdown reveals that within the category of directors, CEO, their spouses and minor children, Mohammed Kasim Hasham, the Chairman, and Mohammed Hussain Hasham, a director on board, are major shareholders. The remaining shares are with the rest of the shareholder categories.

Historical operational performance

In the last six years particularly, the company has experienced a fluctuating topline, with profit margins also following a similar trend.

In MY18, revenue fell for the second consecutive time, nearly 13 percent, reducing topline from over Rs 7 billion to Rs 4.8 billion in MY18. Sugar exports posted a growth of nearly 67 percent, while local sales fell by almost 52 percent. The company claims that although prices in the global market were depressed, the export subsidy by the federal and provincial government made exports viable. On the other hand, cost of production fell to below the 90 percent mark that allowed gross margin to improve immensely to 12.3 percent, from close to 5 percent seen in the previous year. This also reflected in the bottomline that was also supported by share of profit in associates. Thus, net margin was recorded at 8.6 percent for the year.

There was some improvement in MY19 as revenue grew by close to 11 percent to reach over Rs 5 billion. Export sales reduced drastically to Rs 0.4 billion, from previous year’s Rs 2.8 billion while local sales more than doubled as it went from Rs 1.8 billion to almost Rs 5 billion. The latter was due to an increase in both volumes, and prices. With cost of production reducing further to over 84 percent of revenue, gross margin increased to 15.4 percent. This also trickled to the operating margin but net margin was lower year on year at 7.6 percent, versus last year’s 8.6 percent, due to an escalation in finance expense. This, in turn, was a result of an increase in policy rate from 6 percent to 13 percent as well as the need for a higher working capital.

In MY20 the company witnessed the highest revenue growth since MY17, at almost 21 percent, to cross Rs 6 billion in value terms. While exports continued to reduce, local sales grew by 31.4 percent to reach Rs 6.5 billion. This could be attributed to a rise in prices due to lower cane crop and sugar shortage. On the other hand, production cost went up to nearly 93 percent of revenue causing gross margin to shrink to 7 percent. However, the drop in operating margin was mostly contained due to a substantially higher other income coming from gain on disposal of equity instruments and unrealized gain on remeasurement of equity instruments. But net margin fell to less than one percent due to the reduction in share of profit in associates that significantly supported the bottomline in the previous year.

Revenue contracted again in MY21 by 5.6 percent. While export sales disappeared entirely, local sales reduced by over 7 percent. Sucrose recovery also decreased from 11.13 percent to 10.72 percent in MY21. This was attributed to the early start of the season when sugarcane was not completely ripe. But with costs reducing to below 90 percent of revenue, gross margin increased to 10.5 percent. However, this did not reflect in the bottomline that was recorded at a net loss of Rs 24 million due to a significant increase in other expenses coming from unrealized loss on remeasurement of equity instruments, and provision for impairment on long-term investments.

Quarterly results and future outlook

Revenue in the first quarter of MY22 was higher by over 50 percent year on year. This was attributed to strong selling prices for sugar. Sucrose recovery was also higher at 10.33 percent compared to 10.02 percent seen in the same period last year. Production cost was also lower year on year at almost 82 percent of revenue, compared to nearly 89 percent in 1QMY21, allowing for higher gross margin of 18.1 percent. This also reflected in the operating margin but net margin was lower comparatively at over 6 percent, due to the lower share of profit in associates at Rs 23 million, versus Rs 78 million seen in the same period last year.

As per the cane survey, area under cultivation in the country has risen by 10 to 15 percent which means there could be higher sugar production. In 1QMY22, farmers had delayed the harvesting to achieve a higher price but the company expects the scenario to improve as cane supplies increase.