The sugar mill is located in district Tando Allahyar, Sindh, whereas registered offices are located in Dolmen Executive Tower, Karachi.
Pattern of shareholding The pattern of shareholding reveals that the majority of MRNS shares are held with directors of the company. The largest percentage of shares is held with the sponsor directors of the company namely members of the Hasham family and their dependents, whose cumulative share stands at 77 percent of total shareholding.
The largest group of shareholders after members of the sponsor family is of general public, who together hold close to 22.1 percent of the shares. Largest shareholder is State Life Corporation with a shareholding of just one percent.
F & B Bulk Storage (Private) Limited and Bulk Management Pakistan (Pvt.) Limited are private non-shareholding group companies listed as associate entities based on common directors.
History
The foundations of the company were laid in 1930, Hajji Hasham and his sons set up a business in sugar commodity trading. Later in 1965, Mehran Sugar Mills was formed as a public limited company with an annual capacity of 1,500 TCD. The machinery at the time was procured from Mitsubishi Japan; and factory was setup in Tando Allahyar whose climate is considered very conducive for plantation of sugar cane. Total initial investment of over Rupees hundred million was made at the time. In 1968, shares of the company were listed on the KSE index (now PSX).
Installed capacity
The capacity of the plant was increased to 3,500 TCD in 1978 leading to company's recognition among the top 25 KSE companies during 80s decade. Second milling unit was installed in 1994 and total crushing capacity was enhanced to 7,000 TCD. After several rounds of BMR during early 2000s, capacity was increased to 10,000 TCD by 2007, with final enhancement in 2015 to 11,000 TCD.
Production record While Mehran Sugar is a medium-sized player in the sector based on installed capacity, its sucrose recovery rate has remained one of the highest over the past six-year period, and remained consistently higher than industry average over the period under review. In MY18, its sucrose recovery was highest in the country. At 11.52 percent, this is almost one percentage points higher than the industry average, and 13bps higher than the Mirpurkhas Sugar Mill, which trailed at second place.
Higher sucrose recovery is not only a function of better plant practices and efficiency machinery, but owes mostly to healthy cane varieties, which the company encourages it, growers to plant every season.
Sector analysis - MY18 During the period under review, 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's history, and close to 46 percent of total domestic demand.
It should be recalled that while wholesale and retail prices of white sugar are 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 levels not seen since 2007 (in real terms) in international market, indicative price of sugarcane in the domestic market 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, cumulative cost of subsidy extended by federal and provincial governments cost public exchequer close to Rs24 billion.
As the country has recorded annual domestic production of sugar in excess of local demand for at least past seven marketing 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, and in many case, rice and maize.
In addition, water shortfall and limited rainfall during kharif sowing season in southern region has further dampened the sugarcane crop, which historically has had one-fourth share in total domestic output. This is expected to strongly impact total domestic white sugar output, as mills in Sindh have historically enjoyed a higher sucrose recovery level compared to rest of the country.
However, as the groundwater in Sindh is highly saline, during seasons of poor availability of canal water for irrigation, output in Sindh is more strongly affected compared to Punjab.
In summary, the gap between sugar production and domestic demand is expected to contract in the ongoing year, leading to stabilisation of white sugar price levels in the coming months, especially with the onset of summer and Ramadan season, when month-on-month demand for sugar peaks. This has already started showing its effects in March CPI numbers, when year on year prices increased by 19 percent to over Rs62 per kg.
Financial analysis Bumper crop and high opening stocks led to delayed start in sugarcane crushing season, which in Sindh province began at the close of November 2017. While crushing continued well into May 2018, its pace remained slow, with most units operating at less than full capacity.
As a result, efficient units such as Mehran recorded only a marginal increase in production, up by only three percent on a year on year basis to 120.2 million tons of sugar. However, as retail prices remained depressed, top line was constrained, recording a 13 percent year on year dip.
However, owing to selective buying, and high sucrose recovery, company managed to squeeze more out of less top line, with gross profit growing by 120 percent on a year on year basis. This was made possible as the company reduced operating hours, with total sugarcane also witnessing a modest reduction.
Nevertheless, concurrent increases in administrative and distribution cost eroded gains at gross level. Furthermore, as income from exports more than halved, gains were almost completely wiped out, with EBIT performance noting negligible change on horizontal basis.
Nevertheless, outstanding performance from the distillery JV - Unicol - added more than Rs340 million to the bottom line, allowing PBT margin to recover to close to 9 percent. Ex-Unicol, the company would have post-tax loss.
Company account also boasts of installation of a "state of the art" effluent treatment plant that commenced its operations this year after successful trial run in off-season. The company claims to have become fully compliant with regulatory environmental standards.
Future plans In its bid to diversify its revenue streams, the company has recently announced investment into the FMCG sector into a venture called Unifood Industries Limited. Plant and machinery of the project was imported during MY17 and the company began commercial operations during period under review.
UniFoods will focus on commercial cake and baking line allowing it to capitalise on the growing population of urban middle-income segment which boasts a pattern of high spending on consumption. UniFoods is a joint venture between 3 major players of Sindh's sugar sector: Faran Sugar, Habib Sugar, and Mehran Sugar Mills. Mehran Sugar has previously also invested in another joint venture for ethanol production called Unicol Limited, which was incorporated in 2003.
Mehran Sugar Mills has formed a subsidiary power gen company which is yet to commence its operations. The principal activity of the subsidiary company will be to build, operate and maintain a 26.5 MW high pressure co-generation bagasse-based power plant; however, its application for tariff structure is pending with NEPRA.
Industry outlook The crushing season in the country has begun with a delay of two months, in first week of December 2018. As notified support price in Sindh remained unchanged at Rs180 per 40 kg, 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 for marketing year 2019 has remained very low at just 127,487 tons (till Feb-19). While, industry expects respite in export following announcement of subsidy by government of Punjab for Rs5 per kg of export. However, mills from Sindh such as Mehran Sugar cannot avail the same.
LSM data from PBS indicates that sugar production has recorded a year-on-year decline, owing to lower crop output in the kharif season ending November 2018. While full year sugar production could ultimately pick up owing to delayed start of crushing, chances are slim as provisional crop surveys indicate over 20 percent decline in sugarcane harvest in Sindh province alone. While the country will continue to witness a sugar glut, its extent will be limited, which has already begun to reflect itself in retail price of sugar. Market insiders hint that retail price may touch Rs70 per kg during Ramazan 2019, up from average Rs53 per kilo during last year.
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Mehran Sugar Mills Limited
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Rs (mn) MY18 MY17 YoY
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Sales 4,791 5,501 -13%
Cost of Sales (4,201) (5,233) -20%
Gross Profit 590 268 120%
Administrative expenses (276) (243) 14%
Distribution Costs (111) (83) 34%
Profit from operations 202 (58)
Other income 170 363 -53%
Other expenses (69) (9) 642%
Earnings before interest & taxes 302 295 2%
Finance cost (212) (197) 8%
Profit from core operations 90 98 -9%
Share of profit from associates 340 100 240%
Profit before tax 430 199 116%
Taxation (17) (67) -75%
Net profit for the period 413 132 214%
EPS (Rs) 12.89 4.11
GP margin 12.31% 4.87% + 7.44 pp
Operating margin 4.22% -1.06% + 5.28 pp
EBIT margin 6.31% 5.36% + 94 bps
Core operations margin 1.87% 1.79% + 8 bps
PBT margin 8.97% 3.61% + 5.36 pp
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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 children 76.5%
Executives 0.1%
NIT & ICP 0.0%
State Life Insurance Corporation 1.0%
Banks, DFIs, NBFIs, Insurance Co., 0.3%
Mudarabas, & Mutual Funds
General Public 22.1%
Total 100.0%
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Source: Company accounts