Sanghar is the 14th largest sugar mill in Sindh in terms of output (2017), out of total 38 mills located in the province. Manufacturing facilities are located in Sanghar district, with registered offices located in provincial capital, Karachi.
Background & sponsor group
The sugar mill belongs to the influential Rajar family from Sanghar district, Sindh. While associated undertakings/group entities are not disclosed in financials, Rajar family is also engaged in coal mining business.
The company is closely held business with at least 54 percent shares held by sponsor family directly that are disclosed in the financials. No significant shareholding is held by joint stock companies, with up to 9 percent held by NIT. Thus, free float shares are about one-third of total outstanding shares; however, it is possible that additional shareholding of sponsor family constitutes some part of general public share.
Note that Sanghar Sugar Mills is one of the last Sindh-based mills that were also listed on Pakistan stock exchange (then KSE). New mills incorporate since, especially those incorporated during the 1990s decade, have remained private limited.
Business analysis
As per disclosures in Operating Segments, sale of sugar constitutes the primary revenue source for the firm as sales of molasses and bagasse is classified under the same segment based on the convention followed. Revenue from sale of electric power is currently minimal and does not meet the threshold for separate disclosure (estimated at less than 1 percent of total). All sales made by the company are local. The company does not have any sugarcane farming; however, small percentage of sugarcane procured during the marketing year was obtained from farms of sponsor family members.
No increase in installed capacity was observed during the marketing year under review, however, the business has undertaken capacity expansion, and expects to record significant increase in rated capacity in future periods. Existing installed capacity stands at 6,000 tons of sugarcane crushed per day. This comes out to 900,000 tons at industry standard of 150 operating days.
Capacity utilized during the year clocked in at 625,237 tons of cane crushed, which comes out at close to 69 percent of fully operated days, up 6 percentage points from 63 percent utilization of last marketing year. However, as actual operating days stood at 133 days (against 117 days during MY16), it appears that the mills did not record all full operating days.
Operating performance of sugar division recorded significant improvement of over 10 percent, as white sugar produced increased by nearly six thousand tons. However, this was less than the increase in sugarcane crushing which clocked in at 11 percent over last year. The difference in change in crushing and sugar production levels in explained by lower sucrose recovery, which declined by 8bps. However, sucrose recovery level of 10.12 percent recorded by the firm was 20bps higher than the industry average.
Profitability analysis
Financial performance of Sanghar remained dismal during the period under review, as cost of sugar sold during the year exceeded the net sales by the company during the year. At average retail price of Rs 63.5 per kg during the year, it is estimated that the company sold close to 41,240 tons of sugar. This is close to two-thirds of sugar produced by the mills during the year. Gross loss was thus recorded as production levels exceeded sales.
This resulted in ending inventory of more than one billion rupees at year end, which is an increase of 81 percent over the previous period. At average retail price, this is close to 17,250 tons of white sugar, which is nearly 30 percent of average sugar produced by the company during past five years.
Production in excess of demand has resulted in worsening cash flow situation for the company, resulting in increasing reliance on short term bank financing to meet immediate needs. Note that short term borrowing increased, which increased by 100 percent over the previous year. Note that all of closing stock is held by banks under cash against pledged stock facility, once accounted for net margin requirements over net realizable value.
As per conversations with PSMA officials, per kg price of white sugar sold during the year comes out at Rs 55(net of sales tax), whereas per unit cost of white sugar sold comes out at Rs 54 per kg (using cost of sales of sugar division as a proxy), leaving no room for even contribution margin, let alone to cover factory over heads and fixed costs of the business. This is perfectly reflected by Sanghar's financial performance during the year.
The loss thus cascaded downwards, with the company recording 8pp decline in gross and operating margins. Profit before tax further declined by additional 2pp due to increase in financial cost which almost doubled due to increased reliance on bank financing.
Outlook
Sugar milling sector has recorded a highly uncertain period of performance over the last 9-month MY18. Sugarcane plantation and area under cultivation in company's home province remains stable as support price makes the crop highly lucrative for farmers. The convoluted industry dynamics resulted in subsequent losses for most midsized players across the industry.
Interim financials of the sector report that huge carryover stock of sugar from last two seasons has significantly depressed the retail price, which as per news reports has declined to Rs 45 per kg. While this appears to be counterfactual compared to retail prices as reported by industry association, it is true that most firms in the sector have reported dismal performance due to the floor price imposed on raw material.
For crushing season MY18-19, the country expects surplus stock of 1 - 2 million tons. Export permitted by federal government during MY18 came with a strict criterion; moreover, export quota announced in March was not accompanied by a subsidy announcement; thus, the company was not able to benefit from the same. Since global sugar prices have plummeted, review of interim accounts of major sugar players indicate that the industry is expected to perform poorly in the financial year ended September 30, 2018.
Sources say if the support price is not revised down substantially for crushing season beginning November 2018, millers could outright refuse purchase during the next marketing year. Industry association representatives indicate that only 4 mills have begun crushing operations in Punjab, and none in Sindh.
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Pattern of Shareholding (as on September 30, 2017)
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Categories of Shareholders %
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Directors and their dependents 15.4%
Sponsor Family other than directors 37.8%
Executives 0.2%
NIT & ICP 8.9%
Banks, NBFIs, DFIs, Modarabas, Pension Funds 0.9%
Insurance Companies 2.2%
Joint stock companies 0.2%
General Public-Local 34.3%
Total (shares o/s: 11,946,000 at Par value Rs. 10) 100%
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Source: Company accounts
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Sanghar Sugar Mills Limited
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Rs (mn) MY17 MY16 YoY
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Sales 2,583 2,833 -9%
Cost of Sales (2,654) (2,681) -1%
Gross Profit (71) 152 -147%
Administrative expenses (85) (78) 9%
Selling & Distribution Costs (1) (1)
Other operating expenses (12) (22)
Other income 3 9
Profit from operations (165) 60 -376%
Finance cost (94) (49) 93%
Profit before tax (260) 11 -2448%
Taxation (27) 3
Net profit for the period (287) 14 -2158%
EPS (Rs) (24.03) 1.17
GP margin -2.74% 5.35% -8.1pp
Operating margin -6.40% 2.12% -8.5pp
PBT margin -10.05% 0.39% -10.4pp
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Source: Company accounts