Ahmad Faraz Arif
PACRA Maintains Entity Ratings of Mehran Sugar Mills Limited
Pakistan’s sugar industry is the country's 2nd largest agro-based industry, comprising 90 mills with an annual crushing capacity estimated ~ 65–70mln MT. The industry has overcome the raw material supply challenges. However, support price of sugarcane, set by considering the cost incurred by farmers, remains a constraint. The Government increased the support price of sugarcane to PKR 250 per maund for mills operating in Sindh (previously, it was increased to PKR 202). Actual realized sugarcane prices at the mill gate were even higher. During MY21, the overall sugar production increased by 15%, YoY, to 5.7mln MT (MY20: 4.9mln MT) due to better crop availability and an increase in area under cultivation. Sugar prices remained inflated in the local market. To curb this, the Government planned to import 0.8mln MT of sugar. Out of this, 0.3mln MT was imported till Jun-21, whereas, 0.3mln MT was imported till Nov-21. During the current crushing season (MY22), a surge of 10-15% is expected in sugarcane production resulting in an increased total sugar production of ~7mln MT. This along with high sugar prices are expected to remain favorable for the millers.
The ratings reflect Mehran Sugar Mills Limited's ('Mehran Sugar' or 'the Company') strong business profile emanating from a diversified revenue stream, robust governance, and ability to post high recovery rates consistently, averaging in excess of 11% over the past five years. The Company was able to increase its sugar production during MY21 despite the low availability of cane. However, the cane was procured at a higher rate resulting in stressed business margins. To mitigate risks associated with seasonality and volatility in the sugar industry, the Company’s profitability is supported through a strategic joint venture investment in ‘Unicol Limited’, an ethanol production company. The Company has made strategic investments in the FMCG sector through a joint-venture ‘UniFoods Industries Limited’ and in the energy sector through its wholly-owned subsidiary, ‘Mehran Energy Limited’. However, due to stressed performance lately, the Company has booked impairment for both the investments. This further stretched the Company's profit margin during MY21. The management is optimistic that, going forward, the Company's profitability is expected to improve aided by consistent share of profit from Unicol Limited and capital gains/dividend income from short-term trading portfolio. Moreover, the Company was able to procure cane at lower average rates so as to improve the margins in the current crushing season of MY22. The ratings draw comfort from Mehran Sugar’s ability to maintain healthy topline and sizable short-term investment portfolio. The Company’s financial risk profile is characterized by a moderately leveraged capital structure, adequate coverage ratios and adequate working capital management.
The ratings are dependent on the Company’s ability to improve business margins, sustain adequate cashflows and coverages by adhering strict financial discipline, with an increased emphasis on working capital management. Any significant deterioration in margins and/or coverages will adversely impact the ratings.
Mehran Sugar Mills Limited is primarily involved in the production and sale of sugar and ancillary products. The Company has the capacity to crush 12,500 tons of sugarcane per day. The total sugar production during MY21's crushing season stood at 73,092 MT with a recovery rate of 10.72%. Majority shareholding rests with individuals of Hasham Family (75%). The Board is chaired by Mr. M. Kasim Hasham, and Mr. Ahmed Ebrahim serves as the CEO.