Mehran Sugar Mills Limited (PSX: MRNS) was incorporated in Pakistan as a public limited company in 1965. The principal activity of MRNS is the manufacturing and sale of sugar and its by-products.
Pattern of Shareholding
As of September 30, 2022, MRNS has a total of 60.548 million shares outstanding which are held by 1683 shareholders. Individuals have the major shareholding of 94.85 percent in the company out of which around 76 percent shares belong to Directors, CEO, their spouse and minor children while remaining 18.62 percent shares are held by general public. Joint stock companies have a stake of 3.83 percent in the company while insurance companies account for 1.01 percent of the outstanding shares of MRNS. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
MRNS topline marginally slid in 2021 as opposed to the remaining years under consideration where it followed a growth trajectory. Bottomline, on the other hand, kept declining until 2021 where it posted net loss and posted a rebound in 2022. The margins show a mixed pattern during the five-year span whereby the gross and operating margins rose in 2019 and posted a drop in 2020. In 2021, while gross margin greatly improved, operating margin posted a slight downtick. In 2022, both the margins bounced back. Conversely, net margin posted a downfall until 2021 and picked up in 2022. The detailed performance overview of each of the year under consideration is given below.
In 2019, MRNS net sales grew by 11 percent year-on-year. 2019 proved to be a short year with lower cultivation and yields compared to the two previous years as area under cultivation significantly reduced when compared to other crops with better returns. However, the ambiguity and production glut at the start of the year kept the prices under pressure. The government took the timely decision to allow the export of excess sugar which stabilized the prices to a great extent In 2019, MRNS crushed 702,259 M Tons of sugarcane which was 33 percent lesser than the crushing done in 2018. This resulted in a lower capacity utilization of 59.77 percent in 2019 versus 64.77 percent in 2018. This resulted in 80,332 M Tons sugar production and 33,182 M Tons Molasses production which was 33 percent and 36 percent lesser respectively compared to the production of 2018. A major part of the net sales comprise of the revenue proceeds by selling the closing stock of sugar produced in 2018 where cost of production was lower. Hence, the gross profit improved by 39 percent year-on-year in 2019 with GP margin jumping up to 15.4 percent from 12.3 percent in 2018. Distribution expense dropped by 47 percent year-on-year in 2019 due to lower export expenses as the company supplied in the local market due to greater demand and better prices while international sugar prices were hovering at a 5-year low in 2019. Administrative expenses also plunged by 8 percent year-on-year in 2019. Other expense posted a year-on-year fall of 82 percent in 2019 due to no provision booked for impairment of investment at FV OCI as well as no farm expenses incurred during the year. Other income slid by 53 percent year-on-year in 2019 as no exchange gain was earned in 2019. Operating profit grew by 89 percent year-on-year in 2019 with OP margin climbing up to 10.8 percent from 6.3 percent in 2018. Finance cost posted a steep rise of 81 percent year-on-year in 2019 on account of higher discount rate and higher borrowings to make upfront cane payment which increased the working capital requirements despite lower production in 2019. The payment of prior year taxation increased the tax expense for 2019 by 544 percent year-on-year. This pushed the net profit down by 2 percent year-on-year in 2019 with an NP margin of 7.6 percent versus 8.6 percent in 2018. EPS also nosedived from Rs.10.19 in 2018 to Rs.8.67 in 2019.
In 2020, MRNS topline posted a year-on-year rise of 21 percent which is mainly on account of higher sugar prices while volume remained at almost the same level as in the previous year. This was another year of low cultivation and yield. In anticipation, the sugar mills started purchasing the crop on cash payment and better prices which greatly increased the returns to the farmers, making sugarcane a high return crop. This also increased the probability of greater area brought under sugarcane cultivation in the coming years. Sugar price also staggeringly grew during 2020 not only because of lower cultivation and higher prices of cane but also because of the increase in the sales tax from 8 percent to 17 percent. In 2020, MRNS crushed 654,339 M Tons of cane which was 6.8 percent lower than last year. This translated into an even lesser capacity utilization of 49.8 percent in 2020. The sugar production turned out to be 72,821 M Tons in 2020 while Molasses production stood at 29,550 M tons which was 9.35 percent and 10.95 percent lesser respectively when compared to the production volume of 2019. This was the lowest production ever done by the company in ten years. Cost of sales grew by 33 percent year-on-year in 2020 and increase in overhead due to low capacity utilization. This trimmed down the gross profit by 43 percent year-on-year in 2020, culminating into a GP margin of 7.2 percent in 2020. Distribution and administrative expense tumbled by 21 percent and 14 percent respectively. This was on account of lesser export expenses as well as stacking and loading charges as well as lower payroll expense. The company reduced its human resource count from 339 in 2019 to 329 in 2020 due to thin capacity utilization. Other expense also slumped by 52 percent year-on-year in 2020 as no provisioning was done for WWF and WPPF in 2020. Other income posted a robust 231 percent year-on-year growth in 2020 due to gain on disposal of equity instruments at fair value and unrealized gain on the measurement of equity instrument at fair value. Despite contained operating and other expenses and high other income, operating profit shrank by 21 percent year-on-year in 2020 with OP margin sliding down to 7.1 percent. Finance cost dropped by 11 percent year-on-year in 2020 due to low discount rate in the 2HFY20 coupled with lower short-term borrowings. Net profit ticked down by 88 percent year-on-year in 2020 with NP margin clocking in at 0.7 percent. EPS profoundly dropped to Rs.0.96 in 2020.
In 2021, MRNS topline dropped by 6 percent year-on-year. Initially, the forecast was of better yield, however, due to water scarcity and crop disease, the actual harvest was much lower than the nation’s need. This increased the sugarcane prices. The company crushed 682,253 M Tons of sugarcane in 2021 which was 4 percent higher than the previous year. This resulted in a slightly higher production of sugar and molasses to clock in at 73,092 M tons and 31,880 M Tons respectively. The drop in the topline was due to the fact that the company disposed off its stock at lower prices due to ongoing inquiries and inspections. Cost of sales also slid by 9 percent year-on-year in 2021 due to significantly lower repair and maintenance charges. Gross profit grew by 37 percent year-on-year in 2021 with GP margin rebounding to 10.5 percent. Distribution expense slipped by 4 percent year-on-year in 2021 on account of no export expenses due to no export sales made during the year. Administrative expense inched up by 20 percent year-on-year in 2021 due to higher depreciation of right-of-use assets, high legal and professional charges as well as travel and conveyance charges. Payroll expense, however, shrank as the company reduced its number of employees from 329 in 2020 to 324 in 2021. Other expense multiplied by a massive 2312 percent in 2021 due to hefty unrealized loss on re-measurement of equity instruments at fair value. Other income also dwindled by 11 percent year-on-year in 2021 as the company made no unrealized gain on the re-measurement of equity instruments at fair value. This nullified the impact of a sizeable dividend income as well as gain on the disposal of equity instruments at fair value earned in 2021. Operating profit plunged by 8 percent year-on-year in 2021 with OP margin slightly falling to 6.9 percent. Finance cost shrank by 23 percent year-on-year in 2021 due to lower discount rate. The company also booked allowance of Rs. 72.92 million for expected credit losses on long-term investments in 2021. MRNS posted a net loss of Rs.23.82 million in 2021 with a loss per share of Rs.0.40.
In 2022, MRNS topline grew by 14 percent year-on-year. This year, sugarcane crop was much better than the last three years especially in the Punjab region, however, Sindh region lagged behind due to greater returns on other crops coupled with water scarcity in the region. The minimum support price of sugarcane in Sindh was set at Rs.250/40 kg compared to Punjab where the minimum support price was set at Rs.225/40 kg. This put the mills in Sindh including MRNS at a competitive disadvantage. MRNS crushed 856,944 M Tons of sugar in 2022 which was 25.6 percent higher than last year. Sugarcane production increased to 95,642 M Tons in 2022 while molasses production grew to 39,811, signifying an increase of 30.8 percent and 24.8 percent respectively. Despite high cane prices, the overall sugar production of industry stood at 7.9 million tons which was not only 38 percent higher than last year but also the highest ever production recorded by the local industry so far against the consumption forecast of 6.8 million tons. This created a surplus; however, PSMA couldn’t get permission for export which created glut in the domestic market. MRNS’s cost of sales grew by 12 percent year-on-year in 2022, resulting in a GP margin of 11.7 percent. Distribution expense grew by 61 percent year-on-year in 2022 due to higher payroll expense as well as stacking and loading charges. Administrative expense posted a downtick of 3 percent year-on-year due to lower depreciation. Other expense and other income also contracted by 24 percent and 33 percent respectively due to realized and unrealized loss on equity instruments, lesser farm income, no scrap sales made during the year and lesser gain on the disposal of fixed assets and right of use assets in 2022. Operating profit rebounded by 26 percent after two years of decline. OP margin also increased to 7.6 percent. Finance cost grew by 99 percent year-on-year in 2022 due to high discount rate and increased liquidity requirement. MRNS was able to record a net profit of Rs.289.36 million in 2022 with an NP margin 4.2 percent. EPS clocked in at Rs.5.34 in 2022.
Recent Performance (1HFY23, March 2023)
MRNS’s sales significantly grew by 37 percent year-on-year in 1HFY23. This was despite 10.3 percent lower production in 1HFY23 to clock in at 85,796 M Tons of Sugar and 37,867 M tons of Molasses. This was because the company had large quantity of sugar available from the previous crushing season. Moreover, the quality of sugarcane was deteriorated due to devastating floods prior to crushing season. As a result, the company crushed 804,872 M tons of cane in 1HFY23 which was 6 percent less than 1HFY22. Cost of sales grew by a massive 69 percent year-on-year due to increase in the price of sugarcane as growers started harvesting early to mitigate the effects of flood, resulting in lower yield as against the expectation of one of the highest yields in the country’s history. Gross profit tumbled by 43 percent year-on-year in 1HFY23 resulting in GP margin sliding down to 12 percent from 28.8 percent in the same period last year. Distribution expense grew by 29 percent year-on-year in 1HFY23 while administrative cost posted a marginal 1 percent uptick. Other expense shrank by 82 percent year-on-year in 1HFY23 while other income grew by 92 percent year-on-year on account of gain on disposal of non-current assets. Operating profit tapered off by 7 percent year-on-year in 1HFY23 while OP margin dwindled to clock in at 9.6 percent from 14 percent in 1HFY22. The company earned handsome share of profit from its joint venture project, Unicol Limited worth Rs.768.99 million, up 358 percent year-on-year. This proved to be the game changer for MRNS financial results of 1HFY23 and significantly buttressed its bottomline. Finance cost grew by 56 percent year-on-year in 1HFY23 due to high working capital requirements coupled with high discount rate. Net profit grew by 129 percent year-on-year in 1HFY23 to clock in at Rs.396.99 million with an NP margin of 12.5 percent versus 7.5 percent during the same period last year. EPS grew from Rs.2.55 in 1HFY22 to Rs.5.83 in 1HFY23.
Future Outlook
The performance of sugar industry is contingent upon the sugarcane yield coupled with the increase in sugar prices by the authorities. Sugar retail prices are lower than international prices since at least 2013. As sugarcane is planted on less than 5 percent of the country’s agricultural land, low yield results in price wars. Conversely, the prices of sugar can’t be increased by the same margin due to government intervention. This is squeezing the margins of the industry and increasing the chances of smuggling of the commodity, hence need serious deliberation.