SASML is the fifteenth largest sugar mill in Sindh in terms of output (2017), out of total 38 mills located in the province. Registered offices of the company are located on Beaumont Road, Karachi.
Pattern of shareholding
The sugar mill belongs to Essarani family, a well-known business group from rural Sindh. The company is a closely held business with at least 55 percent shares held by sponsor family directly that are disclosed in the financials. No significant shareholding is held by joint stock companies under family stewardship; however, additional 24 percent share is held with related parties, or individuals associated with sponsor family. Thus, control is tightly held with sponsors with fourth-fifths voting power.
Close to three percent share is held with public sector financial institutions falling in various categories; these include, State Life, ICP, PICIC, NIT, NDFC and NBP Trustee. Notably, Islamic Development Bank, a multilateral DFI managed by members of OIC club countries, owns an 8.7 share, making it the only other salient single party investor other than the sponsors. Thus, free float share outstanding are just under ten percent of total outstanding shares; however, it is possible that additional shareholding held with sponsor family constitutes some part of share held with general public.
Note that SASML is one of the last few mills to be listed on the then Karachi Stock exchange (now PSX). New mills incorporated since, especially those incorporated during the 1990s decade, have largely remained private limited, majority of which have been established in the Punjab province.
Business analysis
As per disclosures in Operating Segments, sale of sugar constitutes the primary revenue source for the firm and contributed to over 93 percent (MY17: 87 percent) of top line. Sale of molasses is classified under the same segment given their insignificant contribution and based on the accounting convention followed. Revenue from bagasse is classified under "other income" and constitutes over one-fifth of operating income. The company does not have any sugarcane farming. It is not publicly known whether sponsor family also privately owns as sugarcane farms or any amount of cane was procured in such manner during the year.
The management had undertaken BMR activities during the previous periods, which resulted in increase in installed capacity by one-third. Installed TCD (tons of cane crushed per day) now stands at 8,000 metric tons; however, remained underutilized for reasons explained below.
Based on industry convention of standard 150 days of operations during crushing season every year, annual capacity stands at 1.2 million metric tons. Of this, total crushing during the crushing seasons November 2017 - March 2018 clocked in at 660,056 tons (MY17: 593,037 tons), or 55 percent utilization. Compared to last year, this utilization level declined by 11 percent points. However, note that crushing increased in absolute terms due to increase in capacity during the period under review.
While the financial disclosures note that the plant operated for 133 days (MY17: 126 days) based on 8,000TCD, crushing output is equivalent to 83 full crushing days (MY17: 99 days). Thus, despite substantive increase in output, plant capacity remains highly underutilized.
Year on year increase of nine percent in sugar output accompanied the 11 percent increase in volume of sugarcane crushed. Sugar output stood at 67,245 tons, an increase of over five thousand tons from last year. The two-percentage point difference in crushing and output growth rates is explained by lower sucrose recovery rate, which declined by 22bps during MY18. Note that level of sucrose recovery was nonetheless higher than industry average by 32bps. Recovery has been higher than sector average for past two periods.
In terms of total output, it remains to be seen whether the substantive increase in volumes is in line with industry or the business has outperformed competition as financials of most listed mills in the sector are yet to be announced. Note that sugar mills follow marketing year of October to September, in line with crushing and milling season.
Profitability analysis
The company managed to post a turnaround in financial performance on the back of significant reliance on exports. During the year, the company made export sales of over $15 million, which translates into Rs1,633 million of top line from exports based on average exchange rate of Rs108.
However, as the financials disclose that a total of 42,308 tons of sugar was exported, back of the envelope estimation suggests that sugar was exported at an average of Rs39 per kg, which is at a substantive discount of at least Rs15-20 from rates in domestic market.
The company further augmented its revenue from exports by availing export subsidies from both federal and provincial governments, at a cumulative cost to exchequer of Rs393 million. Income from subsidy is equivalent to 25 percent of export revenue or ten percent of pre-subsidy top line.
As per conversations with PSMA officials, per kg price of white sugar sold during the year comes out at Rs55(net of sales tax), whereas per unit cost of white sugar sold comes out at Rs54 per kg (using cost of sales of sugar division as a proxy).
Profitability was further supported by reduction in indicative price on sugarcane procurement in Sindh, which was reduced mid-crushing season to Rs160 per 40kg (compared to Rs180 in previous periods) after intervention by the High Court. The intervention from courts came on the back of refusal by millers to purchase sugar at the support price set by the government.
Reduced raw material cost, coupled with windfall gain on exchange rate and subsidy on export resulted in a remarkable turnaround with PBT of Rs125 million against Rs454 million losses last year.
Sector 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, however, SASML managed to be an exception this year.
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 some news reports has declined to Rs405 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, and then reviewed again after the new government came into power, was not accompanied by a subsidy announcement. Thus, it is unclear whether the company will be able to keep up the buoyant performance in the upcoming periods. Since global sugar prices have plummeted, review of interim accounts of major sugar players indicate that overall industry performance 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. Support price has been set at Rs182 per 40 kg for the ongoing crushing season 2018-19. 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, 2018)
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Categories of Shareholders %
Directors and their dependents 54.8%
Associated Undertakings & Related Parties 24.1%
Executives 0.0%
Foreign Investors 8.7%
Public Sector Investment Cmpanies 0.0%
Banks, NBFIs, DFIs 0.2%
Insurance Companies 2.7%
Modarabas & Mutual Funds 0.0%
Joint Stock Companies 0.1%
General Public-Local 9.3%
Total (shares o/s: 10,425,000 at Par value Rs. 10) 100%
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Source: Company accounts
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Sindh Abadgar's Sugar Mills Limited
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Rs (mn) MY18 MY17 YoY
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Sales 4,216 2,016 109%
Cost of Sales (3,867) (2,275) 70%
Gross Profit 349 (259)
Administrative expenses (101) (107)
Selling & Distribution Costs (90) (19)
Other operating expenses (10) -
Other income 94 66
Profit from operations 242 (320)
Finance cost (116) (135) -14%
Profit before tax 125 (455)
Taxation (57) 54
Net profit for the period 68 (401)
EPS (Rs) 6.54 (38.43)
GP margin 8.28% -12.86% +22pp
Operating margin 5.73% -15.86% +22pp
PBT margin 2.98% -22.56% +22pp
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Source: Company accounts