Registered office of the company is located in provincial capital, Lahore. Two production units are located in Punjab: one in Kanjwani, Faisalabad; and another in Muzaffargarh. Third production unit is located in Dera Ismail Khan District of Khyber Pakhtunkhwa province.
According to disclosures in financial statements, TSML's principal activities include production and sale of white crystalline sugar, ethanol, and carbon dioxide (top gas). The three production units together have capacity of 32,000 TCD, of which largest unit is located in Muzaffargarh with 13,500 TCD. The other two units of DI Khan and Faisalabad have capacity of 12,000 TCD and 6,500 TCD, respectively (TCD stand for tons of cane crushed per day).
Pattern of shareholding
Reportedly, Tandlianwala Sugar Mills is owned by family of late General Akhtar Abdur Rahman, a significant business group of southern Punjab with diversified commercial interests spanning carbonated beverages, food-grade carbon dioxide, chemical (ethanol) export, and sugar.
However, disclosures to this effect are not made in the company's financials; which may be due to the structuring of the group entities that may not qualify other entities as associated undertakings.
Business activities Sponsor family owns more than three-fourths of the share in the company, held directly by sponsor directors (or spouses/dependents). Currently, for the past 26 years, the company has been engaged in the principal activity of manufacture and sale of white sugar and spirit (ethanol).
Industry dynamics Sugarcane crushing peaked in the domestic market in MY17, backed by industry's expectation at the time of exporting surplus production based on stable prices in international market. Instead, sugar prices in the international market slumped from as high as $500 per ton to $350, building carryover inventory in domestic market which resulted in a downward spiral in final product prices in domestic retail market.
Provincial governments refusal to reduce indicative price levels in the 2018 election year - in spite of millers' protests and refusal/delay in beginning of crushing - citing high cost of production and low retail cost of final product - crop off take by mills was visibly lower reflected in sugarcane utilization dropping 94 to 79 percent between MY17 and MY18.
Low off take in MY18 in turn forced sugarcane growers to reduce plantation in the subsequent season, resulting in crop output declining by as much as 18 percent in the ongoing MY19 season.
While official sugar production numbers are yet to be announced by industry association, delayed beginning of crushing (mid-December 2018) and early close (mid-March 2019), sent out early warning signals to the market.
Wholesale traders in particular (and as per market reports, some mills) adopted a 'go slow' policy, slowing down output release in domestic market. As a result, retail sugar prices increased from average Rs5 per kg to Rs75 between January and June, 2019.
Final PBS-LSM numbers indicate that total sugar production for the year clocked in close to 5.37 million tons, sufficient to meet domestic demand for ongoing year. However, announcement of subsidy on export by provincial government in Punjab also raised fears that domestic stocks may deplete substantially by 2019 calendar year end.
Financial analysis In contrast to popular perceptions, final product sugar is not quite a perishable commodity. Thus, in line with rest of the industry, TSML was able to capitalize on carryover inventory from previous marketing year (MY17), procured at lower prices due to overall bumper crop in the country.
As a result, while sugar production by the company during the marketing year under review declined by 25 percent, even as top line grew by the same number in value terms.
While break up of sales is not available as the company is yet to consider Annual Accounts in the upcoming Annual General Meeting in October, it appears that higher top line may not merely be a result of higher sale off take. Based on profit & loss statement announced on PSX last month, gross margins improved during MY18, even when retail prices in domestic market had remained depressed (lowest since MY13).
It appears that improved top line and profitability margins are in fact a result of subsidy on export 52,894 tons of sugar by the company during period under review, which may have been added to top line (extrapolation based on company's past accounting practices).
Recall that federal government had announced Rs10.7 per kg subsidy on exports, to ease pressure of off depressed domestic prices. Sales mix may be more tilted in the direction of subsidized exports is also corroborated from higher distribution expense, usually a result of higher expenditure on marketing to seek international customers (especially for commodity-based products).
Higher gross margin, by 95 bps, trickled down the bottom-line, as both EBIT and PBT increased by 137 and 153 bps respectively. EBIT appears to have received additional boost from other income, which may be explained by gains on foreign exchange conversion. However, detailed accounts are awaited to confirm these estimates.
Note that despite being one of the biggest (listed as well as non-listed) players in the industry, the company has announced financial results by delay of nearly eight months. Final audited results are still awaited, whereas interim accounts for ongoing period (MY19) have so far also not been announced. No reason has been offered by the company for this delay.
Outlook Fears of domestic sugar stocks depleting substantially by close of 2019 marketing year, as mentioned above, are not entirely unfounded. Opening stocks at the start of marketing year in October-18 stood at two million tons. Since then stocks of 0.6 million tons have been exported as of Aug-19, with expectations of additional 0.1 million tons based on confirmed orders on SBP's daily sugar export monitor.
Meanwhile, annual sugar production declined to 5.37 million tons, putting net availability of sugar stocks excluding exports at 6.5 million tons. With monthly sugar consumption in domestic market estimated at 0.45 million tons, domestic stocks would last until November end, beyond which same may drop in the dangerous territory of 0.5 million tons.
If the tug of war on procurement price (indicative/support price rate) of sugarcane persists in the upcoming crushing year of MY20 as well, start of crushing season may see another delay. Domestic stocks appear stable enough to sail through delays until November, but any delay in beginning of crushing beyond that could bode well for domestic retail prices.
Moreover, if crop output for sugarcane performs below expectations, a low probability event given adequate water availability, growers may be able to extract highest possible asking price for their produce, giving millers little choice but to simply pass on the effect on the end consumer.
From a financial lens, continued improvement of selling price of final product bodes well for company's upcoming financial periods, as shall be reflected in upcoming interim financials for MY19.
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Pattern of Shareholding (as on September 30, 2017)
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Categories of Shareholders %
Directors and their spouse(s) and minor children
Akbar Khan 18.34%
Haroon Khan 19.66%
Ghazi Khan 19.51%
Rasheeda Begum 18.39%
Banks, DFIs, NBFIs, Insurance Co.s, Mudarbas, Funds 0.16%
General Public 23.94%
Total 100.00%
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Source: Company accounts; note: updated ownership for 2018 not available
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TANDLIANWALA SUGAR MILLS LIMITED
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YoY
Rs (mn) MY18 MY17 % chg
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Sales 17,522 13,904 26%
Cost of Sales 14,666) (11,770) 25%
Gross profit 2,857 2,134 34%
Administrative expenses (487) (441) 10%
Distribution costs (453) (351) 29%
Profit/(Loss) from core operations 1,917 1,342
Operating expenses (56) (29) 91%
Other income 80 36 120%
Earnings before interest & taxes 1,941 1,349 44%
Finance cost (1,092) (888) 23%
Profit before tax 849 461 84%
Taxation (32) 10
Net profit for the period 817 471 74%
Earnings per share (Rs) 7.00 4.00
GP margin 16.30% 15.35% + 95 bps
Operating margin 10.94% 9.65% + 129 bps
EBIT margin 11.08% 9.71% + 137 bps
PBT margin 4.85% 3.32% + 153 bps
PAT margin 4.66% 3.39% + 128 bps
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Source: Company accounts