Habib Sugar Mills Limited was incorporated in 1962 as a public limited company with head office in Karachi and its plant located at Nawabshah. The company is engaged in manufacturing and marketing of refined sugar, molasses, ethanol, household textiles and providing bulk storage facilities.
Sugarcane, an important cash crop, is grown over a million hectares and provides the raw material for Pakistan's 78 sugar mills, which comprise the country's second largest agro-industry. Habib Sugar is among the top five sugar mills of Pakistan in terms of its sales revenue. The company comprises of five divisions ie sugar, distillery, terminal, textile and trading.
The crushing operations for 2007-08 commenced on November 15, 2007 and the plant operated for 138 days up to March 31, 2008 as against 137 days in the preceding season. Sugarcane crushed during the period under review was 1,048,808 M.tons with an average sucrose recovery of 9.84% and sugar production of 100,965 M.tons, compared to crushing of 710,965 M.tons, an average sucrose recovery of 9.00% and sugar production of 64,015 M.tons during the preceding season. The capacity has been enhanced by balancing, modernization and replacements (BMR) and also by changing the manufacturing process.

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SYMBOL        CURRENT PRICE      MARKET CAP       TURNOVER
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HABSM           PKR 42.62     PKR 3068640000         10500
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                                    Half year ended
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                             March 31,    March 31,
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                                  2008         2007
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                                     Rupees in '000
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Net Sales                    1,528,964    1,152,380
Cost of sales               -1,231,973     -954,191
Gross Profit                   296,991      198,189
Gross profit Margin (%)           19.4           17
Net profit for the period      166,635      120,944
Earnings per share (PKR)          2.31         1.68
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The increase of 33% in sales revenue during the period Sept-Mar 08 as against the same period last year was mainly due to export of PkR 318 million worth of sugar against zero export during Sept-Mar 07. Distillery and textile division also posted an increase of 34.2% and 42.3% respectively. Average gross profit margin for the segments was lower during the half-year period ending 31st March 07 at 21% compared to 24% in H1'08 because of better volumes and lower cost of production due to a lower support price. Earnings per share have also increased during HY08 because of higher sales and profits as compared to the preceding season.
Cost of sales declined in HY08 as the government of Sindh issued notification on October 20, 2007, fixing the minimum sugarcane support price at Rs. 67 per 40 kgs for the crushing season 2007-08 which was subsequently revised to Rs. 63 per 40 kgs effective January 21, 2008. This reduction in support price decreased the raw material cost and hence boosted profits in HY08.
The major reasons for the decline of 29% in sales revenue in MY07 compared with MY06 were: first, the decrease in volume of sugar production and sale, second, the cost of production continued to increase as support prices for farmers rose, third, the retail price of sugar also fell from an average price of Rs 34.08/kg in 2006 to Rs 29.64/kg in 2007, and last, sucrose recovery also fell by 0.75%. All of these factors contributed to the decline of sales figure in MY07. Between 2003-06 the company experienced rapid sales growth with an average growth rate of 38.7%. This rapid growth was fuelled by a 73% rise in average retail sugar prices during the period 2003-06. The average retail sugar price was Rs 19.65/kg in 2003 and increased to Rs 34.08/kg in 2006. Another major factor during the 2003-06 period was the unhealthy price competition among the sugar mills for sugarcane. This was due to shortage of the sugarcane in Sindh and also the fact that the government increased the minimum support price from Rs 43/40 kgs to Rs 48/40 kgs for the season 2005-06 this was further increased to Rs 60/40 kgs for the same season and led to a halt of the crushing campaign. This increase was a major reason for the higher cost of sales in 2006.
During the crushing season 2004-2005, the availability of sugarcane was lower due to reduced plantation of sugarcane and reduction in yield per acre on account of scanty rainfall/shortage of canal water and drought weather conditions. As a consequence, the quantum of crushing and production of sugar during the season 2004-2005 were both lower by 46% as compared with the previous season. The shortage of sugarcane resulted in an unhealthy price competition between the sugar mills, thus raising the cost of raw material significantly. Even though, the net sales were higher in 2005 by 25% compared with 2004, but the gross profit was lower in 2005, as against the gross profit for 2004 because of a higher cost of production.
Net profit margins for the four-year period have stayed constant around 6.5-7%, this has reflected the saturation situation of the market, with high competition and many players during the period under review Habib Sugar did extremely well as compared to the industry.
Return on assets has consistently being higher than the industry average during the four-year period. This shows that Habib Sugar's revenue generation capacity on assets is more efficient than the top 5 firms' assets. Its profit margin has been consistently higher than the industry average, due to diversification in different operations. ROE has also consistently outperformed the industry, along with ROA.

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                                             2006-07    2005-06
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Crushing duration               Days              137       123
Sugarcane crushed               M.Tons        710,965   536,644
Average sucrose recovery        %                   9      9.75
Sugar production                M.Tons         64,015    52,302
Raw sugar processed             M.Tons          2,989    29,561
Average sucrose recovery        %                95.7     95.41
Sugar production                M.Tons          2,860    28,228
Total sugar production          M.Tons         66,875    80,530
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Return on assets fell in 2007 because lesser raw sugar was processed and hence total sugar production was lower by 13,655 metric tons, this decline lowered earnings and the return on assets.
Liquidity situation of Habib Sugar has continued to improve as against the industry. This is because firstly in the year 2007 Habib Sugar increased its cash and bank balances by around 67.5% compared to the 2006 on a year-on-year basis. This increase in liquidity position meant higher current ratio. The increase in liquidity came from Habib Sugar's increase in deposit accounts from Rs 371 million (2006) to Rs 631 million (2007). Current ratio of the industry has posted a declining trend on the other hand since FY05. Since FY04, the current liabilities of HSM have posted a decline, resulting in an improvement in the current ratio.
Habib Sugar is in a better position as compared with the industry because firms in the sugar industry have to payout raw material cost to farmers before all of the sugar is sold. Such a situation demands sugar producing firms to ensure enough liquidity to meet raw material and financial expenses.
Its inventory turnover rate is far better than the industry average. For the three-year period 2004-06 inventory turnover rate fell consistently for the industry because of better asset management on the part of the industry leaders but as sugarcane support prices rose in 2007 inventory turnover started to increase because of delays in payments to farmers and halt in crushing process. One of the major reasons of Habib Sugar's higher inventory turnover rate compared to industry is because its own trading division, which exports and locally sells sugar.
Debt to equity ratio fell during the five-year period because Habib Sugar increased its paid-up capital to Rs 288 million in 2007 from Rs 162 million in 2004 through right share issue. Such an increase meant that the nominal increase in debts was offset by the large increase in the shares capital value. At present Habib Sugar has a balanced situation with proper financing through equity and assets. This situation is stronger than the rest of the industry leaders because many other big players like Dewan Sugar and Shakarganj didn't increase their paid-up capital over the stated period. For instance Dewan Sugar had Rs 365 million in paid up capital during 2007 as against Rs 365 million in 2005. So by not increasing paid-up capital Dewan and others allowed the debt to climb and put the industry in a situation which is alarming to say the least in terms of debt management.
Habib Sugar has paid higher dividends in terms of stock and cash dividends as compared to the industry. The company has paid out dividend in some form or the other every year as against the industry where the dividend has been consistently lower than HSM.
The EPS has been consistently declining despite an increase in revenues. Increase in equity through bonus shares issue has brought about this decline. Average EPS of the industry on the other hand has remained consistent. HSM, because of its consistent performance is showing an increase in its market price over the years.
FUTURE OUTLOOK
Pakistan's MY2008/09 sugar production is forecasted at 3.67 million metric tons, 12 percent lower than the current year's estimate. Total annual consumption is forecasted at 4.2 million metric tons. Trial production of sugar beet has proven successful but further research is needed. In such a scenario of rising demand and falling supply it is expected that if market conditions prevail then the retail prices will rise dramatically.
The future outlook of Habib Sugar is mixed in the sense that as the government has announced that sugar will not be exported this year; Habib Sugar may be one of the biggest losers of this situation because they always do well in terms of sales and profit when they export sugar. On the positive side, increase in subsidy on fertiliser especially on DAP from Rs 470/bag to Rs 1000/bag will encourage the farmers to buy more DAP and hence lead to increase yield per hectare and eventual better production. We expect Habib Sugar to perform well in inflationary times ahead.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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