J.D.W. Sugar Mills Limited

J.D.W Sugar Mills Limited was founded in 1990 in Rahim Yar Khan. Its market capitalisation is north of Rs 18 billion, making it the only sugar company in the KSE100. As far as sugar companies go, the next-largest by market cap is Habib Sugar with just over Rs 6 billion.
From its Rahim Yar Khan unit, the company expanded over the years and went on to acquire two more units; JDW Unit 2 (formerly United Sugar Mills) came into being in 2005, while JDW Unit 3 (formerly Ghotki Sugar Mills) was incorporated in 2006. The latter boasted a recovery of 10.55 percent in its first year of operations - the highest in the country.
While sugar manufacturing is its core business, JDW recently branched out and added two other segments to its business; corporate farming and co-generation. In corporate farming, the company has set up efficient and ecofriendly farms with higher yields. This has led to the capacity building of existing farmers, thereby resulting in improved and reliable cane supply to the company.
For co-generation, the company has set up two bagasse-based, high-pressure cogeneration power plants with a total capacity of approximately 53 MW. One of these is based in JDW Unit 2 and was commissioned in June 2014, while the other was inaugurated at Unit 3 in October 2014. JDW's financial year starts in October and ends in September.
PRIOR PERFORMANCE JDW has seen sturdy top line growth, with net sales improving by around 50 percent over the five-year period from FY10. Unfortunately, the sugar industry is one where margins remain depressed; the company's gross and net margins have plummeted over the years, with net margins falling by 300 basis points to a dangerously low 3 percent as of FY14.
The sugar industry, much like most industries in Pakistan, is highly regulated. In FY11, the procurement price (Punjab) of sugarcane was raised from Rs 100 per 40kg to Rs 125. This was again raised to Rs 150 in FY12, before settling at Rs 170 for the next two fiscals. This sharp rise in the factor costs has been eating away the margins. Moreover, JDW (or Pakistan, in general) does not have much of a sugar export market. This leaves sugar manufacturers wholly and solely at the mercy of the domestic market.
On a more positive note, JDW's sugar mills have some of the best recovery rates and have managed the highest recovery in Pakistan on many occasions. The graph shows how the company's sugar production has been constantly increasing.
RECENT PERFORMANCE The onset of FY15 was a momentous occasion for JDW Sugar Mills, with the completion of its second energy production unit. With the two new segments, the company was all ready for growth; for the half-year ended March 2015, JDW's top line managed a 9 percent growth year-over-year. However, the company experienced lower yields per acre due to unfavourable crop conditions on the back of almost no rains and non-availability of adequate irrigated water. Nevertheless, sugar recovery was quite impressive, sugar prices were more favourable, and the revenues from the two new segments all helped in delivering robust growth.
Costs were dealt a blow when the support price of sugarcane was increased by Rs 10 during the quarter under review. In spite of this, JDW managed a phenomenal 60 percent increase in its gross profit, and gross margins shot up by 500 bps year-on-year. Finance cost increased by 66 percent owing to higher borrowings for the cogeneration projects and business acquisition. But despite the increases in finance costs and taxes, the company's bottom line went through the roof, with a monumental 242 percent growth over the comparable period last year.
OUTLOOK Pakistan's sugar industry still has its fair share of problems; uncertainty in production, huge carryover sugar stocks, no international markets (other than Afghanistan) to sell to at better prices despite the export subsidy, and the imposition of regulatory duty on export of molasses. However, the government has provided some protection to the local sugar industry by raising the regulatory duty on sugar imports to 25 percent.
For JDW, the future bodes well. With its two newly added segments up and running, the company is now fully vertically integrated. Indigenously producing electricity and sugarcane will no doubt help the company to reduce its costs. Moreover, Ramadan season has also brought about higher demand, so the upcoming financials should be even more impressive.

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J.D.W Sugar Mills Limited

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Rs (Million)              6MFY15   6MFY14          YoY

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Net Sales                 13,972   12,762           9%

Cost of Sales             11,610   11,285           3%

Gross Profit               2,361    1,477          60%

GP Margin                     17%      12%  up 500 bps

Administrative Expenses      386      269          43%

Selling Expenses              14       58         -76%

Other Income                 155       43         260%

Other Operating Expenses      51       40          28%

Finance Cost               1,215      731          66%

Profit Before Taxation       850      423         101%

Taxation                     292       89         228%

Profit After Tax           1,142      334         242%

NP Margin                      8%       3%  up 500 bps

Earnings per share         19.11     5.59         242%

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