Shahtaj Sugar Mills Limited

Shahtaj Sugar Mills Limited (PSX: SHJS) was established as a public limited company in 1965 under the Companies Act, 1913. It manufactures and sells sugar. It also sells by-products, molasses and bagasse. Its manufacturing facility is located in Mandi Bahauddin.

Shareholding pattern

As at September 30, 2021, over 33 percent shares are held by the directors, CEO, their spouses and minor children. Within this, Muneer Nawaz, the CEO of the company, is a major shareholder. Over 31 percent shares are with the general public, followed by close to 17 percent held in investment, insurance companies and NIT. Over nine percent are held in modarabas and mutual funds, while the remaining roughly nine percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly witnessed a fluctuating topline over the years, with profit margins dipping in MY18 before improving again MY19 and onwards.

During MY17, the company experienced the highest revenue growth rate thus far of over 23 percent, with topline nearing Rs 6 billion in value terms. The company produced 115,754 metric tons of sugar compared to 71,599 metric tons seen in the previous year. The higher revenue was attributed to the higher volumes. With sugar recovery rate slightly higher at 10.08 percent, cost of production as a share in revenue was also marginally lower at 88.6 percent. Thus, gross margin rose to 11.37 percent. However, net margin fell to 2.46 percent, compared to 3.8 percent seen in MY16, due to the relatively higher taxation expense.

In MY18, revenue contracted by 16 percent. Sugar production was also lower at 90,756 metric tons at a recovery rate of 9.65 percent. This was attributed to lower availability of sugarcane. Additionally, sales rates were also lower due to huge carryover sugar stock, while the international sugar market was also sluggish. The lower revenue could not cover cost of production, thus the company incurred a gross loss of Rs 132 million. With further costs incurred, it worsened to an all-time high net loss of Rs 409 million.

In MY19, the company saw yet another year of contracting revenue, by 5.5 percent. Sugar production was down to 74,585 metric tons with a recovery rate of 9.94 percent. The decrease in revenue was attributed to lower production volumes. This in turn was due to a late start of crushing season as well as lesser availability of sugarcane. But with cost of production down to nearly 91 percent of revenue, compared to costs exceeding revenue in the previous year, the company earned a gross margin of 9 percent. Net margin, although positive, was recorded at less than one percent for the year due to an escalation in finance expense. The latter was a result of an upward revision in interest rates.

Revenue contracted yet again in MY20 by 1.5 percent. Sugar production fell further to 59,204 metric tons at a recovery rate of 9.4 percent. The lower production was due to a substantial reduction in sugarcane crop. With a marginal incline in cost pf production to over 91 percent of revenue, gross margin reduced to 8.6 percent. But with finance expense continuing to make a higher share in revenue year on year at three percent, combined with a relatively higher taxation expense, the company incurred a loss of Rs 59 million, compared to 0.7 percent seen in the previous year.

After contracting for three consecutive years, revenue in MY21 registered a growth of 39 percent, with topline reaching an all time high of Rs 6.3 billion. Production volumes also posted a growth of 37 percent with 81,181 metric tons of sugar produced at a recovery rate of 9.64 percent. The increase in sugarcane crop cultivation area coupled with a better yield allowed for better procurement of raw material for the company. Moreover, prices of sugar were also higher year on year due to increase in cost of production of sugar as well as high sugar prices in the international market. For the company, cost of production fell to 87 percent of revenue which was the lowest seen since MY12. Therefore, gross margin improved to 12.84 percent. This also reflected in the net margin that was higher year on year at 3.25 percent despite the rise in finance expense to over 4 percent of revenue.

Quarterly results and future outlook

Revenue in the first quarter of MY22 nearly doubled year on year in value terms. Production volumes were also higher year on year by over 26 percent at 27,907 metric tons for the period. However, recovery was lower at 8.72 percent, compared to 9.35 percent seen in 1QMY21. This was due to premature sugarcane crop. However, with a lower production cost at nearly 81 percent of revenue, profitability was significantly better at a net margin of 6.8 percent.

The area under cultivation for sugarcane has increased, as well as a better yield which has built expectations for better sugarcane availability. However, competition between mills is driving raw materials upwards which can have an impact of the company’s performance.