Baba Farid Sugar Mills Limited

Baba Farid Sugar Mills Limited (PSX: BAFS) was incorporated in Pakistan as a public limited company in 1978. The principal activity of the company is the manufacturing and sale of sugar and its by-products which include molasses and V-filter cake.

Pattern of Shareholding

As of September 30, 2023, BAFS has a total of 9.45 million shares outstanding which are held by 1090 shareholders. Directors, CEOs, their spouses, and minor children have the majority stake of 97.185 percent in the company followed by the local general public holding 2.62 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Barring a year-on-year dip in 2019, BAFS’s topline has been riding an uphill trajectory over the period under consideration. Its bottom line stood in the negative zone until 2020. In 2021, BAFS registered net profit followed by net loss yet again in 2022. The company closed the recent year with a net profit, however, the magnitude was much lower when compared to the positive bottom line posted in 2021. BAFS’s margins stayed in the positive zone in 2021 and 2023. While gross margin and net margin considerably improved in the latter year, net margin dropped. The detailed performance review of each of the years under consideration is given below.

In 2019, BAFS’s topline slid by 91 percent year-on-year. During the year, the company was under the process of change of sponsors and management. BAFS was able to crush 26,976 M tons of sugarcane during the year, down 87 percent year-on-year. It was able to produce 1936 M Tons of sugar in 2019 During the transition process of ownership and management, the company remained closed, resulting in lower production. Other factors responsible for lower production were the inability of the previous management to carry out the company’s operations at an optimum level and also because of reduced production of sugar throughout the country. Cost of sales plunged by 69 percent in 2019, resulting in a gross loss of Rs.357.09 million in 2019, up 118 percent year-on-year. Selling and administrative expenses declined by 79 percent and 26 percent respectively in 2019 on account of lower stacking, restacking, and carriage charges and also because of squeezed payroll expenses as the company increasingly hired more contractual employees rather than permanent ones throughout the year. The company wrote off advances that didn’t appear to be recoverable, resulting in a 15293 percent escalation in other expenses, Liabilities no longer payable were also written off by BAFs in 2019, resulting in other income worth Rs.23 million recorded by the company in 2019. Operating loss magnified by 116 percent in 2019 to clock in at Rs.451.43 million. Finance costs inched up by 4 percent in 2019 on account of the higher discount rate. Net loss escalated by 78 percent year-on-year in 2019 to clock in at Rs.682.626 million with a loss per share of Rs.72.24 versus a loss per share of Rs.39.58 in the previous year.

The new management seems to have turned around the company’s fortune as its topline posted a marvelous 1367 percent year-on-year rise in 2020. During the year, BAFS crushed 290,029.035 M Tons of sugarcane, up 975 percent year-on-year. Although sugarcane production in the country was lesser in 2020 when compared to the last year, however, the sucrose content was higher, resulting in the sucrose recovery of 8.67 in 2020 versus 7.18 percent during the previous year. The cost of sales mounted by 267 percent in 2020. BAFS was able to register a gross profit of Rs.28.84 million in 2020 versus net losses during the last two years under consideration. Selling & administrative expenses mounted by 1613 percent and 106 percent respectively in 2020. This was on account of higher stacking, restacking, and carriage charges as well as increased payroll expenses as the number of permanent employees rose from 5 in 2019 to 61 in 2020 and the number of contractual employees grew from 247 in 2019 to 303 in 2020. No write-offs done during the year resulted in 8 percent thinner other expenses incurred by the company in 2020. Conversely, the write-off of liabilities no longer payable coupled with higher scrap sales drove other income by 63 percent in 2020. BAFS’s operational performance couldn’t sustain higher expenses and recorded an operation loss of Rs.83.77 million in 2020, down 81 percent year-on-year. Finance costs inched up by 10 percent in 2020 due to short-term borrowings obtained during the year. BAFS posted a net loss of Rs.286.08 million in 2020, down 58 percent year-on-year with a loss per share of Rs.30.27.

2021 also proved to be encouraging for BAFS despite the outbreak of COVID-19 which restricted business and industrial activities within and across the borders. BAFS crushed 457,224.825 M tons of sugarcane in 2021, up 58 percent year-on-year, and produced 41,501.5 M Tons of sugar, up 65 percent year-on-year. The support price set for Punjab was Rs.200 per 40 kg in 2021 compared to Rs.190 per 40 kg in 2020. However, due to a shortage of supply, the average price went up to Rs.256.51 per 40 kg. This resulted in a 106 percent escalation in the cost of sales during the year. Nevertheless, higher sugar prices in the market due to demand-supply mismatch enabled BAFS to record a gross profit of Rs.250.70 million in 2020, up 769 percent year-on-year. Selling and administrative expenses registered hikes of 80 percent and 25 percent respectively in 2021 on account of commission on the sale of sugar as well as higher payroll expense incurred during the year. BAFS was able to post an operating profit of Rs.281.70 million in 2021 which translated into OP margin of 7.29 percent. Finance costs declined by 40 percent year-on-year in 2021 due to a discount rate slash. For the first time during the period under consideration, BAFS posted a net profit worth Rs.122.218 million in 2021. This translated into EPS of Rs.12.93 and an NP margin of 3.16 percent.

BAFS posted a meager 2 percent year-on-year uptick in its net sales in 2022. Higher support prices encouraged the growers to dedicate more area for this crop. This coupled with better climatic conditions resulted in a bumper sugarcane crop of 88.651 million tons in 2022, which was up 9.4 percent year-on-year. The support price for the year was set at Rs.225 per 40 kg, however, average procurement prices stayed well above the support price on account of price wars. Due to the early start of the crushing season, the sucrose recovery was lesser compared to last year. In 2022, BAFS crushed 604,762.396 M tons of cane, up 32 percent year-on-year. However, with a lower sucrose recovery of 8.93 percent in 2022, the sugar produced was 30 percent higher than last year’s production volume (see the graph of sugar production). Due to a superfluous supply of refined sugar in the market, the company couldn’t offload the entire produce. Moreover, prices were also low during the year. Cost of sales hiked by 10 percent year-on-year in 2022, culminating in a gross loss of Rs.52.25 million. Selling and administrative expenses inched up by 37 percent and 30 percent respectively in 2022. The increase in the former was mainly on account of higher stacking, restacking, and carriage charges due to increased production volume as well as higher prices of POL products during the year while higher payroll expense on account of a bigger workforce also contributed towards elevated administrative expense incurred in 2022. BAFs incurred provisioning worth Rs.105.742 million for doubtful subsidy on exports and advances during the year. This resulted in 702 percent higher other expenses incurred during the year. However, write-offs against the liabilities no longer payable resulted in 132 percent higher other income in 2022 which more than made up for the elevated other expense. This enabled BAFS to post an operating profit of Rs.38.27 million despite recording a gross loss for the year. OP margin, however, drastically fell to 0.97 percent in 2022. Finance cost magnified by 79 percent year-on-year in 2022 on account of unprecedented level of discount rate as well as increased long-term and short-term borrowings obtained during the year. BAFS posted a net loss of Rs.242.297 million in 2022 with a loss per share of Rs.24.64.

Recent Performance (Year ended September 2023)

2023 proved to be blissful for BAFS as not only did its topline boast a 15 percent year-on-year rise, the company was able to register net profit for the second time since 2018. During the year, BAFS crushed 25 percent lesser sugarcane to the tune of 455,913.605 M tons which produced 45,338.90 M tons of sugar, down 16 percent year-on-year. During the year, the support price was set at Rs.300 per 40 kg, up from Rs.225 per 40 kg last year. Higher support prices resulted in a higher cultivated area of 1319 thousand hectares dedicated to sugarcane, up 4.7 percent year-on-year. The company was able to post a higher-ever gross profit of Rs.550.74 million in 2023 as improved sugar prices towards the end of 2023, compensated for lower prices at the start. GP margin attained its optimum level of 12.12 percent in 2023. 87 percent escalation in distribution expense incurred in 2023 was the consequence of higher freight outward as well as stacking, restacking, and carriage charges. Administrative expenses also surged by 32 percent year-on-year in 2023 on account of higher payroll expenses despite the fact that the company streamlined its workforce during the year. Other expenses remained largely intact, however, other income slid by 46 percent in 2023 due to lower write-back against the liabilities no longer payable. BAFS posted an operating profit of Rs.443.02 million in 2023, up 1058 percent year-on-year with an OP margin of 9.75 percent. Finance costs mounted by 70 percent year-on-year in 2023 on the back of the high discount rate. Net profit stood at Rs.90.697 million which translated into EPS of Rs.9.6 and NP margin of 2 percent.

Future Outlook

The Pakistan Bureau of Statistics’ quarterly GDP data reveals an 11% reduction in the area devoted to sugarcane cultivation during the kharif season of 2023-24, with the Punjab province experiencing a more pronounced decline of 14%. Furthermore, the government of Punjab has set the support price of Rs.400 per 40 kg for the ongoing crushing season of 2023-24. Unexpectedly, the substantial rise in Minimum Support Price (MSP) has been readily accepted by the milling industry. This typically indicates that market participants anticipate a shortage of raw materials and intense competition for procurement, hence providing ample grounds to anticipate a price spiral in the local market.