Combined output of company's three units accounts for close to 12 percent of Pakistan's total sugar production. With a market capitalisation north of Rs18.23 billion, JDW is the only sugar mill that is part of the KSE100 index.
From the original Rahim Yar Khan unit, the company expanded and went on to acquire two more units; JDW Unit 2 (formerly United Sugar Mills) in 2005, while JDW Unit 3 (formerly Ghotki Sugar Mills) was incorporated in 2006. The three units put JDW's combined crushing capacity at 44,000 TCD (tons of cane per day).
The company has several subsidiaries, including Deharki Sugar Mills (Pvt.) Limited, Faruki Pulp Mills Limited, Sadiqabad Power (Private) Limited, and Ghotki Power (Private) Limited. Together, these form the consolidated JDW Group, which claims annual revenue of almost Rs44 billion as of MY18 (MY17: Rs52 billion), and assets of Rs67 billion (MY17: Rs49 billion).
While sugar manufacturing is the core business, contributing 75 percent (MY17: 80 percent) of top-line the company has also diversified its revenue stream to other related segments, generating revenue from sale of electricity, molasses, and bagasse led by corporate farming and co-generation divisions.
In corporate farming, the company has established efficient and ecofriendly farms with higher yields, building the capacity of its farmers and giving an improved cane supply. For co-generation, the company has set up two bagasse-based, high-pressure co-generation power plants with a total capacity of approximately 53 MW, both of which were inaugurated in 2014.
Like rest of the sugar mills in the sectors, JDW follows marketing year that starts in October and ends in September 30th. This is in line with beginning of the crushing season in the country, historically.
Pattern of shareholding
Three directors/dependents own close to 51 percent of the company: these include ex-Governor Punjab Mukhdoom Syed Ahmed Mahmud at 26.5 percent, followed by Jahangir Tareen at 21.4 percent and Mrs. Tareen at 3.8 percent. All in all, over 51 percent of JDWS stock is thus in the hands of the owners.
Mr. Tareen's son, Ali Tareen also holds an additional 13.6 percent. Substantial shareholding of 7.4 percent is held by an individual M/s Rana Nasim, whose related party status or relationship to sponsor family is not disclosed. Company executives also hold 7.5 percent. All figures quoted are as at September 30, 2018.
After netting off shareholding held with sponsor family and related parties, general public/free-float comes out at less than 10 percent. Five percent share is also held with a foreign company whose name is not disclosed. Undisclosed joint-stock companies also hold close to four percent share. Share of banks and financial institutions is negligible.
Historical performance
Sugar milling industry has recorded a difficult period for past several years, as price of sugarcane has remained at exorbitantly high rate of Rs180 per 40kg. Given this level of support price and average national sucrose recovery rate of 10 percent, cost of raw sugarcane required for production of 1kg white sugar comes out at Rs45. Due to average carry forward stock of between 1 - 2 million tons for past three years, the industry claims that ex-mill price of sugar has remained between Rs45 - Rs50 per kg, which is insufficient to cover production costs and overheads. As a result, most midsized mills with limited diversification of revenue streams have been suffering, posting profitability in the red, especially since MY16.
However, given its diversified revenues, JDW has never been one of them; the company has been on a growth momentum for past several years, with 5 year sales CAGR at 10.9 percent between MY12 and MY17.
One of the secrets to JDW's success has been high recovery rates and high yield. The company claims that it has enjoyed high yield on cultivation due to two factors. One, over the years, the company has increased investment in corporate farming, thus using modern farming techniques such as precision agriculture to maximise output. Second, since the scale of corporate farming is yet insufficient to meet demands of installed crushing capacity, it procures from independent farmers and growers.
The management proudly claims that it is one of the only few mills in the country that procures sugarcane from farmers at government set rate to incentivise farmers to invest in efficient agricultural practices.
As a result, historically one of the company's three units has delivered the highest sucrose recovery rate in Pakistan; well above the national average.
The most recent year saw very high recovery rates by company's Punjab based units: JDW 1 and JDW 2, and 10.91 percent and 10.54 percent, respectively. However, weighted average sucrose recovery rate was lower due to poor performance by JDW 3, at 9.97 percent. Whether these were the highest recovery rates in the industry is unclear as industry report published by Pakistan Sugar Mills Association is yet to be published.
This is also because southern Punjab region has historically been more climatically conducive for sugarcane crop, where recovery is more than two percent compared to Sindh, an official of PSMA once told BR Research.
JDW's sugar production has maintained an uptrend as well (although it dropped in MY15 owing to unfavorable crop conditions caused by lack of rain and non-availability of irrigated water). The company's hold on the domestic market remains strong; exports form less than fifteen percent of JDW's sugar division sales historically; however, this share grew to close to 50 percent during MY18 for reasons explained below.
A cursory look at JDW's segments confirms that the company has been earning most of its money from sugar. However, the recent improvement in margins over the past couple of years could be due to the activity seen in the electricity segment, which saw two plants come online in 2014.
Recent performance
A cursory analysis of peer annual accounts published on PSX so far reveal that the sugar sector has posted a mixed bag of performance during MY18. Mills such as Al-Noor Sugar, and Al-Abbas Sugar have done well for themselves compared to last year by availing the subsidy on export announced by the Ministry of Commerce in October 2017.
Subsidy of Rs10.7 per kg was announced on export of up to two million tons of white sugar, on first come first served basis. This subsidy was announced keeping in view millers' refusal to begin procurement of sugarcane from growers well into the crushing season.
Millers' refusal to procure sugarcane stemmed from carry forward stock of 1.9 million tons as reported by industry association, PSMA. Furthermore, millers noted that the government set indicative price of sugarcane was artificially high at Rs180 per 40kg.
In addition, due to the high cost of production in the domestic market, as well as a surplus of white sugar globally due to high levels of output by countries such as Brazil, domestic sugar mills were unable to export competitively without government support. As millers blame support price for their lack of competitiveness in export market, federal government had to announce a subsidy in order to ensure that crushing began before widespread protest by farmers broke out.
Mills that were able to secure export orders, thus recorded a jump in revenue and profitability over previous years. As peer SBP disclosures, JDW also secured orders for export of close to 200,000 tons of sugar during MY18 resulting in subsidy entitlement of about Rs2 billion.
The company's profitability declined nevertheless, as it was unable to maintain its share of sale in the domestic market, where it claims price of sugar declined up to Rs45 per kg. While this varies substantially from the average retail price in the country during the year, the differential maybe explained by reliance of company's domestic sugar off take on institutional buyers. Industry sources reveal these include FMCGs such as Engro Foods.
Thus, net sales declined by 18 percent during the year, led by decline in revenue from domestic sugar sales of 42 percent over previous year. If net revenue from sugar sale disclosed in Notes section is used as proxy, company's domestic sugar sale volume comes out at 461,438 tons. Furthermore, given year end sugar inventory of Rs19 billion, stock-in-trade of sugar comes out at close to 0.4 million tons. However, these are only estimates using net realisable value of Rs45 per kg.
Moreover, the company blames poor gross margin on being one of the only sugar mills in the country to pay actual support price rate. It is well known that most mills procure sugarcane at a discount through arthis, at as low as Rs120 per kg. This is corroborated by a fact shared by Ali T. Sheikh of LEAD Pakistan, an Islamabad-based research institute, who noted that less-than support price payments by mills cost up to Rs100 billion to farming economy during last harvest season. Most mills justify this practice by noting that FBR collects sales tax on sugar at arbitrary rate of Rs60 per kg, even though ex-factory price is as low as Rs45 per kg.
As a result of above factors, gross profitability declined by 33 percent over previous year, with gross margin clocking in at 8.36 percent, 182bps lower than last marketing year. Other income also declined due to loss on fair value of sugarcane grown on company's own farms. Delay in release of subsidy by the government, coupled with increase in cost of raw material procurement, resulted in increased reliance on short term borrowing, which increase by net Rs11 billion during the year. Due to higher interest rates, cost of debt servicing increased by 36 percent, leading to a pre-tax loss of Rs141 million, and a decline of five percentage points in PBT margin compared to previous marketing year.
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JDW Sugar Mills Limited
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Rs (mn) MY18 MY17 YoY
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Sales 37,265 45,432 -18%
Cost of Sales (34,148) (40,807) -16%
Gross Profit 3,116 4,625 -33%
Administrative expenses (1,033) (1,099) -6%
Selling expenses (424) (85) 400%
Other income 476 571 -17%
Other operating expenses (5) (167) -97%
Profit from operations 2,129 3,845 -45%
Finance cost (2,270) (1,665) 36%
Profit before tax (141) 2,180 -106%
Taxation (63) (591) -89%
Net profit for the period (203) 1,588 -113%
EPS (Rs) (3.40) 26.57
GP margin 8.36% 10.18% -182bps
Operating margin 5.71% 8.46% -275bps
PBT margin -0.38% 4.80% -518bps
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Source: Company accounts
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Pattern of Shareholding (as on September 30, 2018)
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Categories of Shareholders %
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Directors and their spouse(s) and minor child 52.8%
Related Parties-Ali Khan Tareen 13.6%
Substantial shareholding by an individual-Ran 7.4%
Executives 7.5%
Banks, DFIs, NBFIs, Insurance Co., Pension Fu 0.1%
NIT and ICP 0.0%
Modarabas & Mutual Funds 0.0%
General Public-Local 9.6%
Joint stock companies 3.9%
Investment companies 0.0%
Foreign companies 5.0%
Others 0.0%
Total 100%
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Source: Company accounts