Husein Sugar Mills Limited

Husein Sugar Mills Limited (PSX: HSM) was established under the Companies Act, 1913 (now, Companies Act, 2017). The company manufactures and sells sugar and its byproducts. At its manufacturing facility located in District Faisalabad.

Shareholding pattern

As at September 30, 2021, over 61 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, Chairman Mian Ahmed Ali Tariq and Mian Mustafa Ali Tariq, the CEO of the company are major shareholders. The general public holds nearly 37 percent shares, while the remaining roughly 2 percent shares are with the rest of the shareholder categories.

Historical operational performance

Over the years, Husein Sugar Mills has witnessed a fluctuating topline, with gross and operating margins in the last six years remaining relatively stable till MY21. Net margin, however, saw a sharp decline in MY20 before improving again in MY21.

In MY17, revenue grew by close to 23 percent, to reach almost Rs4 billion in value terms. This can be attributed to the increase in volumes as the company claims it has crushed the highest quantity of sugar cane and produced the highest quantity of sugar at the highest recovery rate to date. Sugar production was at 65,024 metric tons, compared to 46,861 metric tons in MY16, whereas recovery rate improved to 9.85 percent. The higher revenue resulted in the highest gross margin seen, at 12.6 percent. This also trickled to the bottomline, with net margin also recorded at a better over 5 percent, compared to 3.7 percent in MY16.

Revenue contracted by 28.5 percent in MY18 to fall below Rs3 billion. Sugar production reduced to 55,331 metric tons at a recovery rate of 9.21 percent. This can be attributed to a decline in selling prices that have remained low for a large part of the year. This is due to a situation if surplus product in the market. With lower prices, profitability was also affected as gross margin reduced to 9.4 percent for the year. This also trickled to the bottomline, with a net margin of 1.3 percent. The change in net margin is more pronounced due to the rise in finance expense owing to a rise in short term borrowings that could not be offset by a substantial rise in other income of Rs73 million.

Topline bounced back in MY19 as it grew by nearly 35 percent to reach Rs 3.7 billion. This was attributed to an improvement in selling price, rather than volumes. Foreseeing an increase in price, the company adopted a conservative selling strategy by retaining sugar to sell at a higher price. On the other hand, quantity of sugar cane crushed during the year reduced by 18 percent due to unavailability of sugar cane. However, holding the inventory caused cost of production to increase, thus gross margin fell to 6.46 percent. However, other income witnessed a significant rise to Rs 460 million sourced through fair value gain on short term investments. This raised the net margin to an all-time high of 7.88 percent, with net profit also reaching a peak of Rs 293 million.

In MY20, topline contracted by over 20 percent to fall below Rs 3 billion again. The decreased sales revenue was due to majority of the inventory sold after the close of the financial year. Inventory was held for a long period of time to offset the high cost of production seen last year. As a result, gross margin for the year increased to almost 10 percent. But with a drop in other income to Rs 118 million, compared to last year’s Rs 460 million, coupled with a substantial rise in finance expense due to rising interest rates, the company was unable to cover its expenses, and thus incurred a loss of a significant Rs 289 million.

Topline in MY21 more than doubled to reach Rs 6 billion in value terms. Sugar production rose to 74,564 metric tons compared to 43,307 metric tons in MY20 at a recovery rate of 9.12 percent. The substantial rise in revenue is a result of completion of Phase 2 of the company’s Efficiency Improvement Project. The company eliminated administrative bottlenecks, experienced a longer crushing season and adopted technical efficiencies that resulted in higher quantity of sugar cane crushed. However, due to rising sugar cane prices, cost of production grew to over 92 percent of revenue, reducing gross margin to 7.7 percent. Due to some increase in other income, however, the company was able to post a nominal net profit of Rs 23 million.

Quarterly results and future outlook

Revenue in the first quarter of MY22 was higher by 32 percent year on year, while cost of production continued to consume a larger share in revenue as raw material prices, along with other expenses due to inflationary pressures moved upwards. Therefore, profitability was lower at a net margin of 3.6 percent compared to nearly 20 percent in 1QMY21. Moreover, sugar prices are expected to rise throughout 2022 while production is expected to be similar as last year.