TICL: tide turning?

PTI governments’ bad blood with the sugar industry is no secret. Yet, surprisingly, the industry may have been one of the only ones to have consistently made money throughout its tenure between the marketing year 2018 and 2022.

Counterintuitive? Not so much. Especially when you look at the financials of the top firms operating in the segment. Earlier this week, Thal Industries Corporation Limited (PSX: TICL) announced its annual financials on the bourse. At a time when other manufacturing segments have already begun to bleed red, TICL has kept its head high. However, it remains to be seen whether the streak would outlast the change of guard in Islamabad.

The signs are already showing. Topline took a turn for the worse, falling short of last marketing year (MY21) by 7.6 percent. Yet, profitability margins – gross and PBT margins for reference – leapt forward by 480bps and 270bps, respectively. The strong performance in the outgoing marketing year was made possible by a bumper sugarcane crop in the outgoing year, which helped bring down the competition for cane procurement witnessed in recent years, arresting cost of production as a result.

Which brings us to why the PTI years were so profitable for the firms who played smart, never mind the noise in the media around export quotas. While other commodity segments have finally begun to witness production shortfalls during 2022, sugar was the first one to fall down the rabbit hole, long before the pandemic hit (2019). Production shortfall during three of the last four years allowed retail prices of sugar rise to rise faster than the fall in exchange rate: between MY18 and MY22, retail price of sugar rose at a CAGR of 14 percent against annual depreciation in exchange rate of 13.8 percent during the same period (marketing year, Oct – Sep).

As a result, even as TICL’s net revenue in dollar terms fell - $103 Mn in MY22 against $142 Mn at its peak during MY17 – the profitability stands at a much surer footing today than several years ago. And although the industry complains that the rise in minimum support price of sugar (MSP) during the intervening yearseroded its profitability, the cane price to sugar retail price ratio has dropped from 3.36 times to 2.5 times by MY22. In other words, the shift from managed to floating exchange rate regime after 2018 helped rationalize cane prices, which stood at $1.17 per maund in MY22 compared to $1.72 per maund in MY17. In comparison, a kilo of sugar costs 47 cents, compared to 59 cents in MY17. Ergo, the delta is significantly lower for selling price than for cost.

But the tide may be turning again. As the industry starts its new marketing year (2022-23), it is not only complaining of inventory build up amid surplus raw material availability, but of weak demand in the local market as purchasing power is under significant stress. Meanwhile, it is beset with a record rise in cane price, which is substantially higher than inflation in input prices. By year end, the ratio of cane price to sugar price is once again expected to rise to an all time high, especially if sugar prices continue to drop in the local market.

As business cycles go, this may be a particularly hard one for the industry, especially if an overvalued exchange rate makes exporting harder. The last four years don’t look so bad now, after all.