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PACRA Maintains Entity Ratings of Mehran Sugar Mills Limited

Rating Type Entity
(06-Apr-23 )
(06-Apr-22 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

Pakistan’s sugar industry is the country's 2nd largest agro-based industry, comprising 90 mills with an annual crushing capacity estimated ~ 80–90mln MT. The industry has overcome the raw material supply challenges, lately. However, support price of sugarcane, set by the Government considering the cost incurred by farmers, remains a constraint. During MY22, the support prices for sugar-cane in Punjab were fixed at PKR 230/maund and PKR 250/maund in Sindh. Actual realized sugarcane prices at the mill gate were even higher. During MY22, the overall sugar production increased by 9%, YoY, to 7.1msln MT (MY21: 6.5mln MT) due to better crop availability and an increase in area under cultivation. Subsequently, sugar prices witnessed ~12% decrease during MY22 compared to the preceding year. Furthermore, the Government has allowed exports of 0.5mln MT considering the surplus sugar production in the country. During the current crushing season (MY23), loss of area under cultivation of roughly 4.7% amidst flash floods; the forecast of sugar production is affected and is estimated to be ~7mln MT. The support prices have been fixed at PKR 300/maund for Punjab and PKR 302/maund for Sindh. Low sugar prices locally, and increased sugar-cane prices has led to the closure of several mills. However, sugar export, is anticipated to be favorable for 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 MY22 owing to the availability of cane. The margins also witnessed improvement amidst lower procurement costs. However, during the ongoing MY23, the procurement costs and pricing challenge in domestic prices could impact the financial performance. 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 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. 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.

About the Entity
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 MY22's crushing season stood at 95,000 MT with a recovery rate of 11.16%. 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.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.