PACRA Maintains Entity Ratings of Mehran Sugar Mills Limited

The assigned ratings affirm Mehran Sugar Mills Limited as an established player in Pakistan’s sugar industry. A key contributing factor to the ratings is Mehran’s affiliation with the well-established Hasham group, which hold a prominent presence in the country's sugar and related industries. Moreover, a strong governance framework bodes well for the Company. The market risk Company may face includes fluctuations in sugarcane yields and quality, influenced by agronomic conditions and cyclical variations in crop production. Additionally, raw material price volatility further accentuates operational uncertainty, necessitating supply chain, and cost management. This, in turn, impacts profit margins, leading to net losses. Due to the surplus stocks, the government has allowed the sugar millers to export ~0.79 million MT, ensuring liquidity relief for the industry. With the government's shift to deregulated pricing of sugarcane, the cost of goods sold is expected to decline moving forward, as prices are determined by market forces rather than fixed regulations. This transition to a market-driven pricing model will likely lead to more competitive pricing, encouraging efficiency and cost reduction across industries.
On the financial profile side, Mehran Sugar derives its revenue from sugar (~98% local market and ~2% export market). During MY24, the Company’s topline remains stable with a slight increase of 0.04% YoY, primarily due to increased sugar prices. Sugar exports also provided a cushion for sustaining growth. Profitability metrics showed an eroding performance, as gross margin declined by ~62% due to the high procurement cost of sugar cane. Similarly, the operating margin also mirrored the same effect and decline resulting from high operating expenses. Additionally, the Company reported a net loss of PKR 799mln, largely attributed to a substantial increase in finance costs. Furthermore, the Company's financial performance was adversely affected by a share of loss from Unicol Limited, amounting to PKR ~652mln, further contributing to the overall net loss. On the other side, Net working days remained elevated due to the accumulation of finished stock. Leverage indicators remain moderate, primarily due to the company's reliance on short-term borrowing. Looking ahead, the management holds a pessimistic outlook on the company’s fiscal trajectory, citing potential loss contributions from Unicol Limited and the uncertainty surrounding capital gains and dividend income from its short-term trading portfolio.
The company’s credit ratings are predicated on its ability to fortify business margins, sustain robust cash flows, and uphold financial coverages through unwavering financial discipline. An intensified commitment to the meticulous management of working capital is paramount. Any substantive erosion in margins and/or financial coverages would precipitate an adverse recalibration of the company’s credit ratings

About the Entity
Mehran Sugar Mills Limited is principally engaged in the manufacturing and commercialization of sugar and related by-products. The enterprise boasts a daily sugarcane processing capability of 12,500 metric tons. The Hasham Family holds a predominant ownership stake, accounting for 75% of the shareholding. The governance of the Board is presided over by Mr. M. Kasim Hasham, while the executive leadership is steered by Mr. Ahmed Ebrahim in the capacity of Chief Executive Officer.