TICL is one of the oldest sugar mills in the country and the first mill to be incorporated in the South Punjab region. Thal's first production unit was set up in district Layyah, due to which it was also known as Layyah sugar mills in popular parlance. The registered offices of the company are located in Multan city.
Timeline & production capacity The capacity of the plant at its inception was 1,200 tons of sugarcane crushing per day. While the company was originally set up as a private limited concern, it was nationalised during the 1970s socialist regime.
Under government control, the production capacity of the firm was enhanced twice: first from 1,300 tons per day to 2,000TCD in 1980s, followed by increase to 2,700TCD in 1991. The production process was also upgraded to Defecation Remelt Phosphation (DRP), which is still used by majority sugar mills of the country.
The company was privatised in 1998, with majority share acquired by a South Punjab based family. Drastic measures were taken at the time to revolutionize the company including set up of a new milling, turbines, powerhouse, and installation of a boiler. By the year 2001, production capacity of TICL had been enhanced to 3,500TCD.
Early 2000s marked the decade of continued expansion for the mills driven by increasing domestic incomes and consumption, and global commodity price boom. Crushing capacity was further enhanced in two phases to 4,000TCD and 6,700TCD by the end of 2003.
The company also introduced a condensing system and entered the exports market by improving refined sugar quality to international standards. At the same time, TICL began selling surplus electricity to national grid. The group continued on its expansion trajectory by acquiring Safina Sugar Mills in Chiniot district. Acquisition of Safina Sugars brought additional production capacity of 4,500TCD by end of 2008.
The company also setup core-sampler and cane-core testing laboratories, maintaining its pioneer position in the industry. At the same time, total crushing capacity increased to 17,800TCD by 2012, with a further capacity increase to 19,500TCD in the following two years.
Thal Industries is known for catering to multi-national B2B clients due to its high-quality refined sugar. International standards and procedures are kept in view for juice purification and clarification at plants of TICL. Furthermore, state of the art sugar packing enables to ensure smooth and consistent filling, stitching and conveying of the packed sugar in the sugar warehouses.
At Layyah, the company has recently commissioned a new high-pressure boiler with a capacity of 135 tons per hour. This will produce additional 12MW electricity by minimising efficiency losses through installation of efficient equipment. The company plans on further investment in the technologies related to energy conservation and efficiency maximisation.
Sector analysis During the year, price of sugarcane as set by provinces recorded no change over the previous year. The harvest season began (October 2017) with an opening stock of close to 2.5 million tons, highest ever in country history, and close to 46 percent of total domestic demand. Due to the high opening stock, Sindh government notified commencement of crushing season with a delay, beginning November 30th, 2018.
It should be recalled that while wholesale and retail prices of white sugar is not regulated, raw material prices are carefully controlled by the government through support price mechanism, which is notified by the provinces to support farming community.
At a time when price of white sugar has touched historic bottom (in real terms) in international market, indicative price of sugarcane is held high artificially that creates distortion in the market place. High support price encourages growers to increase sugarcane cultivation, which creates a supply glut in the market, even as demand for final product has been inching forward at snail's pace.
As a result, sugar mills rely on support from the government for dumping of excess supply in global commodity market. During MY18 alone, the subsidy cost the federal and provincial exchequers were close to Rs24 billion in total.
As the country has recorded domestic production of sugar in excess of local demand for at least past seven years, seasonal increases in minimum support prices of sugarcane seem to have plateaued for at least past three crushing periods at Rs180 per maund (average for 3 crushing provinces).
Lack of increases in support price in the foreseeable future has adversely affected the sowing of sugarcane crop for the MY19 kharif season. With no further increase in sugarcane rate on the horizon for upcoming periods, it is expected that the crop is losing its momentum, with growers switching to alternate crops such as cotton.
Thus, white sugar rates are expected to stabilise in coming months, at least so far as the domestic market is concerned, as sugar production is expected to decline from historic level recorded in MY18.
Business performance overview Director's report for MY18 notes per acre yield improved as a result of better application of fertiliser and favourable weather. However, volume of sugar produced last year was lower on account of both reduced sucrose recovery and lower demand.
Sugarcane volume crushed during the season was lower by 6 percent as the industry found it hard to offload carryover stock from previous year. In addition, sucrose recovery was also lower by 6 basis point, a marginal drop. Together, this led to six percent year on year reduction white sugar produced.
While the government announced substantial subsidy in the form of freight support of Rs10.70 per kg for an export quota of up to 2 million tons on industry-wide basis, the company was not able to take major advantage of the same.
Based on SBP disclosures, of the total white sugar exported by the industry during the year, Thal Industries share was only 2 percent or 41,372 tons, against which it availed subsidy of Rs443 million. The number is cross-verified from notes to financials.
As a result, share of exports in top-line in value terms was a paltry 10 percent. While the company's focus on domestic market sales at a time of excess supply may seem surprising, the company enjoys advantage in terms of group-wide synergies with sister concern, Naubahar Bottling Company, Pakistan's largest manufacturer and distributor of Pepsi cola soft drinks.
As per disclosures in notes, up to 17 percent of total sales were to Naubahar Bottling Company, which also appears to be the single largest B2B customer of the company.
Financial analysis Overall, top-line receded by 5 percent on a year-on-year basis due to depressed demand side pressures. Gross margin reduced by a significant 9 percentage points, however, it will not be surprising if the same is a result of transfer pricing between inter-group sales.
While the company managed to barely record profitability on gross basis with 2.63 percent GP margin, it was able to sustain EBIT position thanks to subsidy inflow of Rs442 million. As a result, EBIT margin sustained at 2.37 percent. However, in absence of subsidy, the company would have recorded a loss on operations of Rs188 million.
It is unclear from cash flow disclosures whether the company is also suffering from delays by the government in disbursement of subsidy amount or not.
Outlook
The crushing season has begun with a delay of two months, in first week of December 2018. As notified support price in Sindh and Punjab have remained unchanged at Rs182 and Rs180 per 40 kg respectively, crop size is expected to be 25 percent lower than last year.
So far, the federal government has not announced any subsidy on export quota of 1.1 million tons, due to which export during 1QMY19 remained very low at just 70,614 tons. While, industry expects respite in export following announcement of subsidy by government of Punjab for Rs5 per kg of export.
However, it remains to be seen whether Sindh government will follow suit and announce subsidy for mills located in the province, as the political party in power is beleaguered by allegations of unfairly supporting sugar mills.
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THAL INDUSTRIES CORPORATION LIMITED
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Rs (mn) MY18 MY17 YoY
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Sales 14,104 14,919 -5%
Cost of Sales (13,735) (13,076) 5%
Gross Profit 369 1,843 -80%
Administrative expenses (409) (373) 10%
Distribution Costs (148) (162) -9%
Profit from operations (188) 1,308 -114%
Other income 521 48 990%
Other expenses 1 (68) -101%
Earnings before interest & taxes 334 1,288 -74%
Finance cost (486) (347) 40%
Profit before tax (152) 942 -116%
Taxation (7) (233) -97%
Net profit for the period (160) 708 -5%
EPS (Rs) (10.68) 47.15
GP margin 2.62% 12.35% -9.74 pp
Operating margin -1.33% 8.77% -10.1 pp
EBIT margin 2.37% 8.64% -6.27 pp
PBT margin -1.08% 6.31% -7.39 pp
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Source: Company accounts
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Pattern of Shareholding (as at September 30, 2018)
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Categories of Shareholders %
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Directors & their dependants 52.6%
NIT & ICP 0.0%
Banks, DFIs, NBFIs 0.0%
Insurance Companies 0.0%
Modarabas and Mutual Funds 0.0%
General Public-Local 47.3%
General Public-Foreign 0.0%
Total 100.0%
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Source: Company accounts