Sakrand Sugar Mills Limited

Sakrand Sugar Mills Limited (PSX:SKRS) was the third sugar mill to be established in district Shaheed Benazirabad (formerly Nawabshah) of Sindh province. Incorporated in 1989, it is a mid-sized unit with installed crushing capacity close to 865,000 metric tons per season. However, due to low production in recent years, the company ranks among small-sized units in the province by output.
Outside of southern Sindh, district Nawabshah has the largest area under sugarcane cultivation in the province, specifically in central Sindh - averaging at 35,000 hectares per annum. In total, the region has four sugar milling units, with average crushing of three million tons of sugarcane each season during the last two years.
As the capacity installed in the district, led by two leading players - Al-Noor Sugar and Habib Sugar - is in excess of regional sugarcane output, mills in the region have to compete for raw material procurement and often rely on supply from neighbouring districts/regions.
Since the installation of Bandhi Sugar Mills in the district circa 2011 - the latest mill to be set up in the area - output of Sakrand Sugar has drastically fallen to almost half of its peak in MY14, in what appears to be due to shortage of sugarcane in the area.
Pattern of shareholding
Sakrand Sugar Mills is owned by a Parsi family, with roots in the province pre-dating Pakistan's independence. Primary sponsor of the business is Dr Dinshaw Hoshang Anklesaria, who is also known for his commercial interests in real-estate development in Karachi.
Directors and family members together own close to 43.3 percent of outstanding 22.3 million shares, of which Dinshaw Anklesaria alone holds 25 percent. In addition, another 15.6 percent is held by three major individual investors, Muhammad Farooq and Yasir Gul - whose link to sponsor family is unclear.
Put together, significant shareholders own 59 percent share on cumulative basis, followed by 31 percent held by individuals (undisclosed as per convention due to less than five percent shareholding held by each). All banks, DFIs, and NBFIs, put together own an additional 7.67 percent. Remainder 2.5 percent is held by various PLCs, cooperative societies etc.
Business performance
Back in MY16, Sakrand Sugar Mills fell down to fourth and last place by crushing and output volume in the district and has remained in that position ever since. As of MY18 - latest full year financial period - the company held only 13 percent share in white sugar produced in the region, trailing Bandhi Sugar at 17 percent, Habib at 34 percent, and Al-Noor at 36 percent.
The weak performance has been led by various factors, foremost being the saturation of milling segment in the region making raw material sugarcane dearer. Weak balance sheet position due to past losses in turn has led the company to rely heavily on bank borrowing, reflected in high spread over Kibor charged by commercial banks in the range of 250bps - resulting in constrained cash flow situation.
This in turn affects the management's ability to timely procure high quality sugarcane with the onset of harvest season. This is supported by the fact that company's sucrose recovery ratio has trailed district average by close 50bps from MY12 to MY17, with MY18 being a noted exception to the long-term trend.
A comparison firm's sucrose recovery ratio against region, province and national averages shows that even though mills in the province outperform national sucrose recovery average by 40bps, during the last decade Sakrand Sugar Mill's performance has even trailed national average. This trend is a reflection due to better cash flow position, other mills in the region are able to timely procure high quality cane from farmers, whereas Sakrand is left with low-yield raw material. This in turn increases its incremental cost of production.
Financial performance
Due to higher marginal cost of production compared to its peers, Sakrand Sugar Mills has posted a gross loss for every year between MY13 and MY16, with gross profit for MY17 barely entering in green. Moreover, unlike larger regional competitors such as Al-Noor and Habib, Sakrand has zero diversification of top-line, fully relying on production and sale white crystalline sugar for over 92 percent of its gross revenue on average, with byproduct molasses being the only other contributor.
The management was finally able to proclaim MY18 as a turnaround year as gross margin touched 27.6 percent. This appears remarkable considering net sales in value were second lowest in past seven years.
Impressive gross margin came on the back of two factors: first, an interim ruling by Sindh High Court setting indicative price of sugarcane at Rs 160 per 40kg, as against Rs 182 per 40 kg in previous years. This reduced cost of manufacturing significantly, with further support received from issuance of export quota by the federal government.
The company exported close 6,500 tons of white sugar during the year, raking in Rs 245 million additional revenue. The export quota was also accompanied by subsidy by both federal and provincial governments, for a total of Rs 20 per kg (or Rs 20,000 per ton).
Given the high gross margin, an upsurge in overhead and other expenses of more than 25 percent year on year was nearly not enough to make a dent in a period of soaring profitability, as the company ended with an operating margin of 22 percent compared to negative 3.25 percent in the preceding year.
Moreover, subsidy on export of Rs 131 million took the EBIT even higher - however, the benefit was partially cancelled out by higher debt servicing cost during the year due to higher interest rates. Nevertheless, the company ended with before and after-tax margins in double digits.
Outlook
Unfortunately, it is unlikely that the company will be able to maintain financial performance of MY18 in the ongoing financial year. On one hand, sugarcane cultivation and production in Sindh province was lower by nearly one-fifth during the most recent season, which has reduced overall crushing in the industry by as much extent.
Although, this has been partially mitigated by the higher unit prices for white sugar in the retail market, supply of raw material was heavily constrained in the domestic market, especially in Sindh province. Market intelligence indicates that millers had to pay premium over indicative price to procure sugarcane, with average raw material cost possibly clocking in close to Rs 225 per 40 kg.
This in turn is once again will lead to bloated production cost, with smaller units such as Sakrand feeling the pinch harder due to lack of scale.

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Pattern of Shareholding (as on September 30, 2018)

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Categories of Shareholders                                   %

Directors and their dependants                           43.3%

Major sponsors other than directors                      15.6%

Joint Stock companies                                     2.0%

Investment Companies                                    0.320%

Banks, DFIs, Insurance Co., Modarabas & Mutual Funds    7.670%

Cooperative Societies                                   0.020%

Individuals                                            31.120%

Total                                                   100.0%

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Sakrand Sugar Mills Limited

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Rs (mn)                               MY18      MY17            YoY

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Sales                                1,822     2,348           -22%

Cost of Sales                      (1,318)   (2,343)           -44%

Gross Profit                           504         5         11031%

Administrative expenses               (98)      (78)            25%

Distribution Costs                     (5)       (3)            72%

Profit from core operations            401      (76)

Other expenses                        (50)         4

Other income                           144       332           -57%

Earnings before interest & taxes       494       259            91%

Finance income/(cost)                (106)      (35)           203%

Profit before tax                      388       224            73%

Taxation Reversal/(liability)        (120)      (27)           349%

Net profit for the period              268       197            36%

EPS (Rs)                              6.01      5.94

GP margin                           27.64%     0.19%   +ve 27.45 pp

Operating margin                    21.99%    -3.25%   +ve 25.24 pp

EBIT margin                         27.13%    11.03%   +ve 16.10 pp

PBT margin                          21.30%     9.54%   +ve 11.76 pp

NPT margin                          14.72%     8.40%    +ve 6.32 pp

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