Dewan Sugar Mills Limited

Introduction Dewan Sugar Mills Limited (PSX: DWSM) was incorporated as a public limited company in 1982 and commenced commercial operations in 1987 after listing on the then Karachi and Lahore Stock Exchanges. Its registered offices are located in Karachi; whereas production unit is located in Mirpur Bathoro, district Sujawal of Sindh.
The company began operations as a sugarcane-based mill and production capacity of 3,500 tons crushing per day which it has since expanded to 8,000 tons per day. Over the years, it has also expanded its operations beyond sugarcane crushing to setting up of an in-house distillery for ethanol production (from molasses); particleboard manufacturing (from bagasse waste); and a polypropylene segment (fertilizer bags). However, as of MY18, sugar and distillery segment together contribute over 98 percent of top line.
Pattern of shareholding The company was founded by Dewan Muhammad Mushtaq and until 2009 was the largest sugar mill in the province. By 2004, the group had also taken over three private limited mills in the province, namely Khoski, Bawany, and Al-Asif (now Abdullah Shah Ghazi), to become the largest sugar milling group in the country for a brief period in mid-2000s.
Today, over two-third of shareholding in the company is held by group's primary sponsor, Yusuf Dewan. Once an industrial behemoth whose assets spanned textile, polyester fibre, cement, construction and automotives, since 2008 Yusuf Dewan group has seen its wings clipped with most of conglomerates' assets either sold-off or under restructuring.
The three sugar milling units acquired in 2000s were also divested, whereas the JV with Hyundai and Kia have also been wound up.
Business analysis Once the largest sugar milling unit in the region, DWSM has been reduced to a mid-sized unit which is struggling to keep its head above water. DWSM's troubles are not due to failure of company's business model, as much as it is a result of reversal in sponsor family's fortunes.
Back in 2006-09 when group's highly leveraged yarn business declared its first default, commercial banks quickly began to withdraw borrowing facilities from group companies, creating difficulties for its milling unit whose model largely depends on securing working capital financing against raw material pledge of sugarcane.
Due to sheer scale of the group at the time, banks' action in self-interest to limit exposure to dwindling Dewan fortunes brought DWSM operations to a screeching halt, which by 2016 was operating at less than 20 percent capacity utilization.
Since then, two subsequent seasons of bumper crop in Sindh coupled with stable indicative pricing of sugarcane has helped rehabilitate turnover as volume have more than doubled from its trough of MY16 - and crushing days have also increased from 75 days to over four months in MY18.
Nevertheless, cash flow constraints mean that competitor mills in the region are able to procure higher quality sugarcane early on into the harvest season. Note that Sindh's southern sugarcane belt of Hyderabad-Thatta-Badin has traditionally been synonymous with high-sucrose content cane. Despite that, DWSM's recovery level over the past six years has been lowest when compared to district-; province-; and nation-wide averages.
This is in sharp contrast to most other mills in the province, whose sucrose recovery level is higher than national average (true for 30 out of 38 mills in the province as of MY18). As a result, poor sucrose recovery level not only affects cost of production of sugar segment - as company has to crush greater volume of sugarcane for production of incremental volume of white sugar - but also affects profitability of its distillery operation, which in large part depend on quantity of molasses produced.
Polypropylene segment was founded for production of poly-bags for repackaging and branding of imported fertilizer - under the brand of "Salsabil" - for onwards supply/sale to growers in the area. It was shut down in MY18; whereas particleboard segment contributed less than two percent of revenue due to inadequate availability of raw material - bagasse.
DWSM's primary regional competitor, Shahmurad, is also a major player in the distillery segment, and has come to dominate the sector on the back of vertical integration and supply of molasses from sister-concern Al-Noor. Nevertheless, during the year, DWSM's ethanol segment recorded its highest-ever turnover in nominal terms on the back of export demand.
It is pertinent, however, to mention that on stand-alone basis, ethanol segment's contribution margin at 15 percent is lowest amongst its peers, as the company appears to rely on external sources for procurement of molasses. In recent years, distilleries that largely consume molasses generated from internal milling operations have recorded contribution margin in excess of fifty percent.
Financial analysis
DWSM is reeling under pressure of high leverage and delays in reaching an inter-credit agreement for restructuring of its long-term debt close to Rs 3 billion (including current portion which it has struggled to pay timely).
This is signified from the fact that the last time company received an unqualified opinion from its external auditors was in 2014. During three subsequent periods, auditors issued a qualified opinion on account of default on repayment of installment on restructured term finance facility of Rs 2.44 billion, along with its markup of close to Rs 900 million.
Finally in MY18, when lenders refused company's restructuring proposal, auditor issued an 'adverse opinion', the worst possible opinion that may be awarded by external auditors. This has been issued keeping in mind that in absence of re-negotiation of the inter-creditor agreement, both principal and mark-up portion of long-term facility become immediately due and should be classified under current liabilities.
Today, company's balance sheet solvency largely depends on subsequent rounds of revaluation of property plant and equipment, characteristic of firms undergoing default. Liquidity situation is extremely tenuous, with cash ratio of only 0.01x. As a result, the 'going concern' assumption has been questioned by the external auditors; keeping in mind that solvency ratio has also declined to 0.14x.
Outlook
DWSM's hope for survival rest primarily on continued sponsor support through possible equity injection on subordinated loans, coupled with reprofiling of long-term debt by lenders. Nevertheless, due to group's unblemished profile with its trade creditors - growers that supply raw material sugarcane, along with philanthropic activities carried out by the sponsor family in the milling region, it hopes to continue crushing operations for the foreseeable future. Distillery outlook appears favourable, especially as its demand remains export-led and the company is set to benefit from rupee depreciation, assuming if raw material molasses supply in the B2B market remains stable.

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DEWAN SUGAR MILLS LIMITED

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Rs (mn)                               MY18      MY17            YoY

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Sales                                4,738     2,985            59%

Cost of Sales                       (5,003)   (3,465)           44%

Gross Loss                            (264)     (480)          -45%

Administrative expenses               (122)     (125)           -3%

Distribution Costs                    (199)      (92)          116%

Loss from core operations             (585)     (698)          -16%

Other income/(expenses)               (147)        3

Earnings before interest & taxe s     (732)     (695)

Finance income/(cost)                  (86)      (79)            9%

Loss before tax                       (818)     (773)            6%

Taxation Reversal/(liability)           30        17            73%

Net loss for the period               (788)     (756)            4%

EPS (Rs)                            (10.37)   (11.36)

GP margin                            -5.58%   -16.09%  +ve 10.51 pp

Operating margin                    -12.35%   -23.38%  +ve 11.02 pp

EBIT margin                         -15.46%   -23.27%   +ve 7.81 pp

PBT margin                          -17.26%   -25.91%   +ve 8.64 pp

NPT margin                          -16.63%   -25.33%   +ve 8.70 pp

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Pattern of Shareholding (as on September 30, 2018)

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Categories of Shareholders                                        %

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Directors and their dependants                                 0.0%

M/s Dewan Motorrs (Pvt.) Limited                               3.2%

M/s Dewan Mushtaq Motors Co (Pvt.) Limited                     3.2%

NIT & ICP                                                      1.9%

Public Sector Corporations                                     0.5%

Banks, DFIs, Insurance Co., Modarabas & Mutual Funds           0.1%

Substantial shareholder: Dewan M. Yousuf Farooqui             67.0%

Individuals                                                 24.200%

Total                                                        100.0%

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