Noon Sugar Mills Limited

Noon Sugar Mills Limited (PSX: NONS) was incorporated in Pakistan in 1964 as a publicly listed company for the manufacture of white sugar. The company has its production plant in Punjab which became operational in 1966 with an annual capacity of over 500,000 MT of sugarcane. Over the years, the company has enhanced its crushing capacity to over 1 million MT of sugarcane.

In 1986, NONS added an Alcohol Distillery Division of French Origin to its production. In the subsequent years, two production facilities to provide fuel grade Ethanol were also added.

Pattern of Shareholding

As of the year ending September 2022, the company has a total of 16.517 million shares outstanding which are held by 1743 shareholders. NONS’s Parent Company is its largest shareholder with 44.32 percent of shares. Directors, CEO, their spouses, and minor children account for 22.84 percent of the company’s shares followed by joint stock companies with a stake of 12.76 percent. The local general public owns 10.84 percent of NONS’s shares. Foreign companies have an 8.7 percent shareholding of the company. The remaining shares are held by other categories of shareholders such as NIT and ICP, Insurance companies, Banks, DFIs and NBFIs, etc.

Historical Performance (2018-2022)

The top line of NONS shows an upward trajectory in all the years except 2019 where it took a 10 percent year-on-year hit. In 2019, the company crushed 37.5 percent lesser sugarcane than it did in 2018 and hence produced 63,098 MT of sugar compared to 98,655 MT of sugar in 2018. Similarly, the alcohol produced during the year was also 19.5 percent lesser than the previous year. Sugarcane cultivated areas significantly dropped during the year resulting in an obvious fall in sugarcane production which is why the company operated for a lesser number of days for both sugar and alcohol production. Cost savings coming on the heels of a small operational period coupled with an increase in sugar prices helped the company strengthen its GP margin which stood at 15.26 percent in 2019 versus 11.34 in 2018. While operating expenses grew in line with inflation, discount rate hike, and the Pak Rupee devaluation, other income, with a 47 percent year-on-year plunge became a sorry sight for NONS in 2019. The drop in other income is attributable to a significant decline in Bagasse and press mud sales as well as a lesser sale of electricity to FESCO. Finance costs also magnified on the heels of a high discount rate and an increase in short-term finances to meet the working capital requirement. During the year, the reduced availability of sugarcane created a price war to provide sugarcane only on cash payment. Despite all the off-putting factors, the bottom line could muster a year-on-year growth of 7 percent with the NP margin clocking in at 3.97 percent in 2019 versus 3.36 percent in the previous year.

After 2019, comes the COVID year with its share of protocols and operational bottlenecks. While sugar production posted a drop of 16 percent year-on-year in 2020, alcohol production rebounded because of its usage in sanitizing products. Increased sales of alcohol coupled with a substantial increase in sugar prices helped the topline grow at a pace of 8 percent year-on-year with the GP margin standing at 15.64 percent during the year, showing a marginal uptick. Other expenses gave some breather to the bottom line due to stable currency which resulted in no exchange loss incurred during the year versus the exchange loss of Rs6.2 million in 2018. A huge rise in Bagasse and press mud sales during the year helped other income grow by 22 percent year-on-year in 2020. The bottom line reasonably grew by 14 percent year-on-year in 2020 with the NP margin clocking in at 4.17 percent, boasting a sound growth over the previous year.

2021 tells a rather mystifying story where the company made the highest topline growth of 50 percent year-on-year but its bottom line shrank and margins tightened. Let’s discover the underlying details. During the year, the company produced over 50 more sugar and alcohol to clock in at 82,710 MT and 37,033 MT respectively. This coupled with improved prices helped muster impressive topline growth. However, the high cost of raw materials – both in sugar and alcohol production – squeezed the GP margin to clock in at 10.95 percent, the lowest in all the years under consideration. Loading, unloading, freight, and export expenses blew up the distribution expenses by a whopping 31 percent year-on-year. Then statutory charges also amplified the other expense, the result of which was a drop in operating profit during the year despite handsome sales growth. Finance costs gave some breather as the discount rate significantly dropped during the year to help revive the economic activity after COVID. Yet, the bottom line dropped by 1 percent year-on-year during 2021, with an NP margin of 2.77 percent, the lowest mark since 2017.

2022 was a challenging year for the sugar industry due to devastating floods which inundated the agricultural area and damaged a huge quantity of Kharif crops including sugarcane. This led the company to procure sugarcane from distant areas to ensure maximum capacity utilization to meet the demand. The minimum support price of cane also grew from Rs.200 to Rs.240 per 40 kg which increased the cost of production. However, high sales volume and better pricing helped the GP margin grow to 13 percent during the year. While a substantial jump in finance cost and distribution cost during the year is justifiable owing to the high discount rate and superior freight and export expenses respectively, other expenses and other income posted the most intriguing growth of over 200 percent during 2022. Other income progressed on the back of hefty exchange gains on export sales coupled with remarkable Bagasse, molasses, and press mud sales during the year. Other expenses on the other hand showed an ugly picture as the company booked loss provision on doubtful receivable balance against the sale of electricity to FESCO in the prior years. Despite the rough year, the company was able to attain a hefty 83 percent year-on-year growth in the bottom line with an improved NP margin of 3.88 percent.

Recent Performance (First quarter ended Dec-22)

NONS’s first-quarter results reflected a 37 percent year-on-year drop in the top line. This came on the back of lower sales volume in both the sugar and distillery divisions. NONS produced 27,555 MT of sugar which is 5 percent less than what was produced in the same period last year. Ethanol production posted a whopping 46 percent year-on-year drop to clock in at 1.92 million liters.

The curtailed production volume and lesser number of operating days were also reflected in the drop in cost of sales which helped NONS almost double its GP margin to clock in at 21.63 percent. Operating expenses also remained in check owing to lesser sales volume and operating days, providing a significant rise to the OP margin during the period. Ban on sugar exports coupled with lesser export sales of the spirit contained the freight and export charges but also deprived the company of massive exchange gains owing to the sharp depreciation of the Pak Rupee.

Finance cost grew by over 100 percent owing to multiple hikes in discount rates over the year coupled with a massive rise in trade payable and running finances availed during the year to meet the working capital needs.

Amidst low cost of sales and operating expenses, high finance costs couldn’t do much harm to the bottom line which grew by 28 percent year-on-year with NP margin standing at 6.66 percent versus 3.27 percent in a similar period last year.

Future Outlook

With a significant rise in the support price of sugarcane from Rs.225 per 40 kg for the last harvest versus Rs.300 per 40 kg for the recent crushing season, the cost of raw material will multiply by over 33 percent. This coupled with high discount rates and energy costs along with the imposition of super tax are likely to keep the margins of the sugar industry under pressure. The distillery sector also pleads for government support as high sugarcane prices have increased the cost of production of ethanol amidst depressed international ethanol prices which might render local ethanol uncompetitive in the international market. The government has also withdrawn a substantial portion of subsidized markup schemes for the export-oriented industry.

With the ban on sugar exports lifted, the sector is looking forward to banks and other concerned authorities helping the sector materialize this important support scheme and fetch some dollars for the foreign currency-deprived state.