Mirpurkhas Sugar Mills Limited

Mirpurkhas Sugar Mills Limited (PSX: MIRKS) was incorporated in Pakistan on May 27, 1964 as a public limited company and its shares are quoted on Pakistan Stock Exchange. Principal activity of the company is manufacturing and selling of sugar. The registered office of the company is situated at Hub Post Office Sugar Mill Jamrao, Umerkot Road, Sindh.
Timeline of the Company
Mirpurkhas Sugar Mills began operations in February 1966 with an initial production capacity of 1,500 tons cane per day (TCD) through double carbonation double suphitation process (DCDS). By the end of the same decade, company had increased its production capacity to 2,000TCD.
By marketing year 1989 (MY89), the company had already achieved highest sugarcane crushing level of 747,344 tons in the country, thanks to optimisation of production processes. The mushrooming growth in number of sugar mills in the country during the following decade led to the company becoming a midsized player in the domestic industry, losing the mantle of industry leader.
Plant capacity has since been improved a number of times through as a result of continuous BMR initiatives, and currently stands at 12,500TCD per day.
Early on, the company used to export molasses in its raw form; however, realising the export potential of value-added products in this line, the company set up a distillery by the name of Unicol Limited with the help of two other sugar mill groups, Mehran and Faran Sugar Mills Limited.
Unicol Limited has been in operations for the last ten years and produces ethanol from molasses obtained as a byproduct of sugarcane crushing process. In addition, the company captures byproduct carbon dioxide from ethanol production process and uses it to produce liquefied food grade carbon dioxide on commercial basis.
Other investments include Uni Energy Limited and Uni Foods Industries, both of which are a joint venture with its partners Mehran and Faran Sugar mill groups. Uni Foods began commercial operations last year and has been setup as an FMCG, whereas Uni Energy is a wind power unit. Profit from Unicol (the molasses-based distillery) played a crucial role in years of financial distress to minimize losses from sugar milling process.
MIRKS began corporate farming during MY12 with a land area of 871 acres, which allowed the company to reach Rs3 billion in sales the following marketing year. Farming areas was subsequently increased to 1,500 acres in the next three years. Corporate farming also allowed the company to maximize yield, by increasing sucrose recovery level to highest ever 11.39 percent during the period under review. Sucrose content ratio currently stands at almost 1.37 pp higher than national average.
Pattern of shareholding
Mirpurkhas Sugar Mills is a Ghulam Farooq Group (GFG) company. Close to 47 percent of shares in the company are held by sponsors through associated undertakings, majority of which is held through Faruque (Pvt.) Limited, which functions as group's holding company. Other well-known group entities include Cherat Cement Company and Greaves Pakistan (Pvt.) Limited, Directors and their dependents own less than one percent of shareholding.
Primary business analysis
Performance of sugar division recorded remained subdued based on production volumes. The company only recorded a nominal increase of 4.8 percent in total sugarcane crushed, due to high carryover stock from last year and better sucrose recovery levels, highest ever for the company and 71bps higher than the previous year.
At the same time, MY18 recorded the highest ever sugar production levels for the company, led primarily by management's desire to capture greater share of export quota announced by the federal government during November 2017 - June 2018 marketing period.
Furthermore, as the company relies heavily on its own sugarcane plantation, it has to process all of the sugarcane produced on company-owned farms, regardless of demand of end product, thus for past two years it has recorded highest ever production numbers.
Due to better sucrose recovery, output of sugar rose by 12 percent over previous year, 7 percentage point higher than had there been no change in recovery levels.
Capacity utilisation however declined in absolute terms as installed capacity improved by up to 50 percent from existing 8,500TCD at the beginning of the year. In real terms and using industry standard crushing cycle of 150 days, capacity utilisation clocked in at 41 percent, down from 58 percent in MY17.
While it appears counter intuitive that the company is increasing capacity in the time of excess supply of primary product, management's focus on increasing capacity is not only to capture greater share of domestic sugar demand but also to increase supply of molasses to sister concern Unicol for production of ethanol, a lucrative export-oriented commodity. The company had also increased capacity by 13.33 percent in the year before by undertaking BMR activities. As a result, sugarcane crushed and white sugar produced both increased by more than 18 percent during the period under review.
Financial analysis
The company staged a turnaround on the sales front in MY18, led by heavy reliance on exports. Exports recorded a sector wide resurgence on the back of substantial subsidy of Rs10.7 per kg by federal government in the form of freight support on for a total of two million tons of sugar (for whole industry). Export rebound for mills operating in Sindh was even better, as provincial government announced an additional subsidy of 9.30 per kg for a maximum export of 20,000 tons of sugar per mill.
As a result, out of total 101,496 tons of sugar sold by the company during the period, up to 73 percent of volumetric off take was for exports. Sales volume increased by almost 96 percent over previous year, when in the absence of export subsidy, the company was only able to sell 51,937 tons of sugar, mainly in domestic market, where a supply glut still persists.
Back of the envelope calculation suggest that the company may be entitled to up to Rs796 million in federal subsidy, with an additional Rs186 million from provincial government.
The gains from subsidy allowed the company to post a turnaround in financial performance, with gross margin of 9.16 percent compared to a loss of 1.68 percent in the previous year. Bottom line also recorded similar improvement, from PBT margin of negative -10.45 percent to 2.68 percent in MY18.
Outlook
The crushing season has begun with a delay of two months, in first week of December 2018. As notified support price in Sindh and Punjab have remained unchanged at Rs182 and 180 per 40 kg respectively, crop size is expected to be 25 percent lower than last year.
So far, the federal government has not announced any subsidy on export quota of 1.1 million tons, due to which export during 1QMY19 remained very low at just 70,614 tons. However, some respite in export is expected if Sindh government decides to allow subsidy, following in the footsteps of Punjab government. As per news reports, proposals to this extent are currently under consideration.

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Mirpurkhas Sugar Mills Limited

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Rs (mn)                           MY18      MY17         YoY

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Sales                            4,170     2,802         49%

Cost of Sales                  (3,789)   (2,849)         33%

Gross Profit                       382      (47)

Administrative expenses          (162)     (120)

Distribution Costs               (221)      (48)        359%

Other operating expenses         (238)       (3)       7671%

Profit from operations           (238)     (219)          9%

Other income                       156        45        247%

Share of profit in associates      405       110        268%

Finance cost                     (210)     (229)

Profit before tax                  112     (293)

Taxation                          (38)        23

Net profit for the period           73     (270)

EPS (Rs)                          5.97   (22.01)

GP margin                        9.16%    -1.68%   +10.84 pp

Operating margin                -5.72%    -7.80%    +2.08 pp

PBT margin                       2.68%   -10.45%   +13.13 pp

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Source: Company accounts

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Pattern of Shareholding (as at September 30, 2018)

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Categories of Shareholders                             %

Associated Undertakings & Related Parties

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Faruque (Private) Limited                          41.4%

Greaves Pakistan (Private) Limited                  2.4%

Cherat Cement Company Limited                       2.1%

Directors & their dependants                        1.0%

Public Sector Corporations                          6.2%

Banks, DFIs, NBFIs, Insurance Co., Pension Funds    1.1%

Mutual Funds-CDC Trustee NIT                        9.4%

General Public-Local                               25.8%

Foreign Companies                                   0.6%

Others                                             10.1%

Total                                             100.0%

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