Registered offices of the company are located in Gulberg, Lahore; whereas milling unit is located in the town of Jaranwala, Faisalabad district.
Background & sponsor group
Husein Sugar Mills was the fifth mill to be incorporated in Punjab province post-partition and counted itself among the largest mills in the central Punjab region, but has lost the mantle to new entrants since.
Husein Sugar is a closely held business. While the mill was founded by Late Mian Shamim Anwar, part of Sargodha Group of Companies, it is currently controlled by Mian Ali Tariq family, a co-founder.
Two of Mian Tariq's sons, Mian Ahmed and Mian Mustafa, together own 57 percent of shares in the company, who are also executive directors in the business. While this represents significant multiplication in directors' holding during the year under review, it only represents transfer of shareholding from sponsor family member, Ms. Sadia Ali Tariq. Thus, as per disclosures in the financials, close to three-fifths of issued shares remain within the sponsor family.
Remainder 42 percent shareholding is held with the general public; however, this aggregate appears to not include any shareholder with more than five percent shares.
During the previous marketing year, the company had issued right shares and managed to raise Rs200 million in share capital (incl. premium on right share issue). This was in addition to director's loan extended as subordinated loan of Rs531 million injected as hybrid equity. The support was extended by sponsors in the aftermath of accumulated losses reaching nearly Rs800 million as a result of consecutive losses between MY14 to MY16. As of MY18, net equity (excl. reval.) to accumulated losses ratio has reached 2.6x, from 0.74x in MY16.
Business analysis
As per disclosures in the operating segment section, over 92 percent of company's revenue comes from sale of white sugar, with sale of molasses and press mud contributing seven and one percent in gross revenue, respectively.
Against the industry-wide trend, revenue from export of sugar declined by 84 percent on a year on year basis. This is despite announcement of freight subsidy on export of Rs10.3 per kilo, which was not in place during the previous year. Based on BR Research estimates, the company exported close to 3,050 tons in MY18, at an average price of Rs38,700 per ton or $320. This is confirmed by the receipt of Rs32.635 million recorded under the head of freight subsidy.
It appears that the company did not take advantage of the support on export as part of a conscious policy. According to the director's report, "acting upon market intelligence..., the management pursued a relatively conservative selling strategy...Foreseeing that the market prices for the commodity were bound to increase significantly at the end of the year, the management...decided to retain a significant quantity of sugar this year."
As a result, the company saw a steep increase in finished goods stock from opening level of Rs225 million to Rs885 million at year end.
However, it is notable that close to 58 percent of company's sales are made to a single customer in Pakistan. In addition, during the year the company expanded its sales to include North America.
At Rs4,500 per ton price of sugarcane (based on support price rate of Rs180 per maund), and sucrose recovery rate of 9.53 (average of current and previous year), the company appears to have sold close to 57,500 tons of white sugar during the year. Excluding export sale volume, average per ton gross sale price of locally sold sugar comes close to Rs48,600. The back of the envelope suggestion seems to confirm industry's view that sales tax on sugar has been set a rate higher than prevailing market price.
Sugar volume produced during the year declined by 15 percent as a result of excess supply in the market, along with conscious move by the company to lower production due to high levels of existing inventory, and "wait and see policy", as explained above. Cane crushing declined only by nine percent in comparison; the difference is explained by lower sucrose recovery rate as which declined by 64 bps.
Profitability analysis
Double digit decline in revenue came on the back of significant decline in volume off take, for reasons explained previously. As a result, gross profit fell by nearly half, with gross margin eroding by more than 3 percentage points. Had it not been for freight subsidy extended by the federal government on exports, gross margin erosion would have been higher by an additional 1 percentage point.
The company managed to keep its overheads and selling expenses under check at last year' levels. However, erosion in to-pline was significant enough to lead to a tremendous decline in profit from core operations, which fell to less than one-third compared to MY17.
Some support was received from other income, mainly recorded on gain on sale of fertilizers to cane farmers in the reserve area. These amounted to Rs92 million and added nearly 3.5pp to EBIT margin. However, the support was no where enough to keep last year's profitability momentum going. As bottom line became further depressed on the back of higher finance cost as a result of 3 percentage point increase in discount rate during the year under review.
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 has remained unchanged at Rs180 per 40 kg, crop size is expected to be 25 percent lower in Sindh province compared to last year.
Due to the fiscal pressures at the center, the new government has refused to offer subsidy on export; however, it has increased export quota to 1.1 million tons. In the absence of subsidy, export volumes have remained diminished, with total exports for 9MFY19 clocking in at 377,677 tons, against 1.01 million tons exported during the same period last year. Per ton export price in dollar terms has also declined, from average price of $360 per ton fetched last year to $305 per ton during the ongoing period. While industry expected respite in export following announcement of subsidy by government of Punjab for Rs5 per kg of export in January 2019, same seems to not have begun to reflect in monthly export numbers so far.
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 the southern region.
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. As Ramazan season begins, retail price of sugar has touched Rs70 per kg in urban centers such as Islamabad and Karachi, up from average Rs53 per kilo during last year.
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Husein Sugar Mills Limited
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Rs (mn) MY18 MY17 YoY
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Sales 2,756 3,857 -29%
Cost of Sales (2,492) (3,371) -26%
Gross Profit 264 485 -46%
Administrative expenses (161) (168) -4%
Distribution Costs (16) (17) -9%
Profit from core operations 87 300 -71%
Other income 93 30 212%
Other expenses (8) (14) -43%
Earnings before interest & taxes 172 316 -46%
Finance cost (142) (87) 63%
Profit before tax 30 229 -87%
Taxation 3 (27) -111%
Net profit for the period 33 202 -84%
EPS (Rs) 1.55 9.55
GP margin 9.57% 12.58% -ve 302bps
Operating margin 3.16% 7.79% -ve 463bps
EBIT margin 6.23% 8.20% -ve 197bps
PBT margin 1.08% 5.93% -ve 486bps
NPT margin 1.19% 5.23% -ve 404bps
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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 56.6%
Banks, DFIs, NBFIs, Insurance Co., Mudarabas, & Mutual 0.0%
Joint stock companies 1.1%
Others 0.1%
General Public 42.1%
Total 100.0%
Significant shareholding more than 10%
- Mian Ahmed Ali Tariq 27.7%
- Mian Mustafa Ali Tariq 27.7%
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Source: Company accounts