Tandlianwala Sugar Mills Limited

Tandlianwala Sugar Mills Limited (TSML) is an enterprise of the 80s. It was incorporated in 1988 as a public limited company. The company's shares are listed in the Pakistan Stock Exchange under the moniker, TSML.
While the company started out as a sugar producing group, it has expanded its operations into production of ethanol, making it Pakistan's largest producer and exporter of ethanol for two years running now. Like other sugar producing companies, TSML operates according to the marketing year that runs from October to September.
Operations TSML has two large divisions: sugar production and distillery. These divisions produce three principal products - Sugar, Ethanol and Carbon Dioxide (CO2). Sugar production remains the primary activity for TSML forming around 80 percent of sales. The company has three sugar producing units located in Faisalabad, Dera Ismail Khan and Muzzafargarh, respectively.
TSML is popularly known for its ethanol production. With its second distillery unit, which first became functional in December 2015, in Muzaffargarh along with the one in Faisalabad, TSML now has a generation capacity of 225,000 litres of ethanol per day. This increased capacity has allowed TSML to climb up the exporters' ladder and raise revenues.
The 'Top gas' (CO2) plant in Faisalabad is another revenue-producing segment that has, apparently, been operating profitably over the years. A major portion of the sales come from selling CO2 to beverage plants. The plant has a capacity of 48 tons per day.
Shareholding pattern The firm's shareholding pattern shows that out of a total of 117.7 million outstanding shares, around 80 percent are owned by the company's executives and their families. The public holds only around 12 percent of shares while the remaining 9 percent are owned by foreign companies.
Financial analysis TSML has emerged as quite a black horse in the sugar industry. The company suffered losses of the magnitude Rs 383 million in 2013. From there to making profits of Rs 897 million in the marketing year ended 2016, the jump has been significant. The gross margins have improved as well. More importantly, the ameliorating trend in operating margins has helped the firm salvage its position from the dip seen in MY13.
During MY13, the cost of sales amounted to around 90 percent of gross sales, whereas the administrative and other expenses consumed around 10 percent. Following MY13, TSML seems to have been getting their act together, by working on the costs of sales and other expenses. The percentage contribution of sales costs has declined and now averages around 83 percent (close to that of other big sugar companies). The administrative and other associated costs have been brought down to a mere two percent. This operational efficiency is reflected in its operating margins over the years.
For the MY16, the company registered an after-tax profit of Rs 898 million, which is a 52 percent increase over previous year. According to the director's report, this is the highest profit the company has registered in its 29-year history. It could be attributable to favourable domestic sugar prices coupled with timely exports. A decrease in financing cost (lower long-term debt and SBP discount rate) has also worked in favour for TSML.
Since TSML is primarily a sugar-producing company, the major chunk of sales is generated from the sugar-producing units. Sugar production has exhibited an upwards trend over the years, with slight variations. The combined crushing capacity of its three units, which now stands at 32,000 tons of cane per day (TCD), makes it one of the top sugar mills in the sector.
TSML's distillery functions form an important 15 percent of the gross sales. TSML has shown increasing inclination towards expanding production to maintain its position as the leader of ethanol production and exports in Pakistan. The MY16 registered a slight decrease in sales, which was led by low international ethanol prices and relatively inflated costs of procuring molasses for production. However, operationally, the two units seem to be faring well and so reasonable profit were made, as per the director's report.
Exports form a considerable portion of sales since both sugar and ethanol are exported. The share of exports has averaged around 27 percent of the gross sales. Not only is TSML the biggest ethanol exporter in the country, it is also one of the largest sugar exporters in Pakistan.
Latest financial performance The latest financial picture, despite the company's expected positive outlook, is somewhat bleak. Gross sales have taken a dip of 29 percent, followed by operating profits, and eventually net profits that have fallen by 35 percent as well.
According to the Director's report, the crushing activity for the nine-month period ended June 30, 2017 has been higher than the previous season, resulting in greater sugar production. However, local sugar prices were declining during the period, which could explain the loss in gross sales. Additionally, low ethanol prices internationally have impacted sales. This, coupled with an excise duty of Rs 2 per litre on ethanol production, levied by the Punjab government, explain the significant top line fall in the period under review.
In the year-to-date period, the TSML stock has visibly under-performed the KSE100, almost becoming its mirror image. But there isn't much to read, as TSML is a very thinly-traded stock, with average trading volume below the level of 200 shares per day. The stock's value has declined by almost a third in the year-to-date period.
Outlook The MY17 looks set to be a year of sugar surplus for Pakistan. Hence, sugar exports are expected to feature significantly in the sales of major sugar-producing companies. TSML expects to be among the top exporters of sugar but is looking towards government support in terms of subsidies and long-term incentives to sustain its exporting capacity.
Additionally, sugar prices domestically are expected to be low this MY as well. Though occasionally, there will be price fluctuations based on millers' sugar supply to the market. For sugar mills to sustain their profitability, it is imperative to explore cost-saving options and alternative revenue streams.
TSML appears to be faring well in this domain. It is already underway in making its operations more effective through up gradation of its production units - this includes improved technologies for energy efficiency. It is also expected to expand its sugar production capacity to 38,750 TCD by the end of the year. These, coupled with an expected record production of ethanol should allow TSML to sustain comfortably, despite sector challenges.

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TSML: Pattern of shareholding            Shares held   % of total

 (as of September 30, 2016)                                shares

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Directors, CEO, and their spouse

and minor children                        92,969,518       78.98%

Associated companies, undertakings

and related parties                                0        0.00%

Banks, funds, DFIs, NBFIs, etc.              231,640        0.20%

General public (local)                    13,894,205       11.80%

Others:

Foreign companies                         10,610,937        9.01%

Total                                    117,706,300      100.00%

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Source: Company accounts

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TSML: Financial snapshot

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Rs (mn)                            MY16      MY15     MY14      MY13

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Financial position

Share capital                     1,200     1,200    1,200     1,200

Shareholders' equity              5,730     4,876    4,434     4,419

Long-term finances (secured)        916     1,245    1,602       136

Trade and other payables          1,532     1,943    2,309     2,060

Property, plant and equipment    11,247    10,954    9,836     7,755

Stock in trade                    2,979     4,022    4,008     2,136

Operating results

Net turnover                     18,675    16,520   13,000    12,295

Gross profit                      2,417     2,219    1,425       860

Operating profit / (loss)         1,843     1,636      986     (284)

Profit / (loss) after tax           898       592      247     (383)

Earning per share - Rs             7.63      5.03     2.10     -3.25

Financial ratios (based on net turnover)

Gross margin                        13%       13%      11%        7%

Operating margin                    10%       10%       8%       -2%

Net margin                           5%        4%       2%       -3%

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Data source: Company accounts

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TSML: Latest financials

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Rs (mn)               Oct-Jun 2017    Oct-Jun 2016   Yoy chg

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Net sales                   10,878       15,325         -29%

Gross profit                 1,770        1,855          -5%

Operating profit             1,082        1,382         -22%

Net profit                     303          469         -35%

EPS                           2.57         3.98         -35%

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