What constitutes a stellar financial performance at the time of economic slowdown? Pakistan’s top sugar milling company, JDW Sugar (PSX: JDWS) posted its nine-months marketing year performance, and a 38 percent jump in top line surely qualifies.
As in previous years, sugar division continues to contribute overwhelming share of revenue, at 87.5 percent. Although export’s contribution declined compared to previous year – from 30 percent of segment sales to just under 15 percent - that was mostly a function of lower export quota announced by the government – 1.1 million tons compared to 2 million tons on country-wide basis. This includes income on freight support of Rs558 million compared to Rs2.1 billion last year.
The bonhomie in top line came on the back of close to a 100 percent jump in local sales, as retail price of sugar finally showed an upward trend beginning March-2019, after excess stocks of close 2 million tons were exported to foreign markets in the last 18 months.
As profit from core operations reached levels last witnessed in MY17, further support was received due to additional gain on foreign exchange of Rs290 million, recorded under other income.
Given the current trajectory of sugar prices in retail market, MY19 may yet prove to be the year of highest-top line for JDW, as the company is sitting on estimated stocks of 0.25-0.3 million tons of sugar, with three more months of sales to go.
Even so, while the company has reduced average debt levels from 60 percent of asset base to just 45 percent, cost of debt servicing has become steeper due to repeated rounds of monetary policy tightening by the central bank. Average debt servicing cost between previous and current year increased by more than 6 percentage points, although interest cover ratio remained stable on account of higher EBIT.
Meanwhile, while the sugarcane supply remained constrained due to lower acreage during last season, the three JDW units recorded highest-ever sucrose recovery ratios, which is a commendable feat in a year of poor water availability.
Channel checks suggest that due to constrained supply, mills across the province had to pay premium over minimum support price to procure cane during MY19. Nevertheless, given that the gross margin managed to inch forward, it appears that the premium was not significant enough to send cost of production in an upward spiral.
However, if the supply of sugarcane becomes further constrained in the upcoming season, it is quite possible that gross profitability may come under pressure in MY20. Meanwhile, if steep debt servicing cost does not change gears either, the sector including JDWS may be in for a tough ride in the next marketing year.