The Pakistan Credit Rating Agency Limited
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Usama Zahid Sarhandi

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PACRA Upgrades Entity Ratings of Noon Sugar Mills Limited

Rating Type Entity
(30-Sep-20 )
(07-Nov-19 )
Action Upgrade Maintain
Long Term BBB+ BBB
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

Pakistan’s sugar industry is the 2nd largest agro based industry after textile, comprising ~ 90 mills with annual crushing capacity estimated around 65 – 75 mln MT. It contributes about 0.6% to GDP and 2.9% of total value addition in agriculture. In previous years, the industry was under pressure owing to over supply combined with challenges in the support price mechanism. Additionally, a slowdown in international sugar prices made exports viable only through subsidy support. Government approved an export quota upto 1 MMT, however, no subsidy was announced. Consequently, zero exports were reported in August 2020 (August 2019: ~USD 5mln). During MY20, sugar production declined by ~9% YoY and clocked in at ~4.8MT (MY19: ~5.27MT), owing to reduction in the area under cultivation and water scarcity. Sugar prices improved in local market as inventory levels reduced. Due to low crop availability in the crushing period ended Mar-20. The Government increased the support price of sugarcane to PKR 190 per maund (previously PKR180). Actual realized sugarcane price at mill gate were higher. Despite increase in costs, higher local sugar prices have improved miller's profitability.

The ratings reflects Noon Sugar Mills Limited ('Noon Sugar' or 'the Company') diverse revenue stream, comprising the sale of sugar and allied products, electricity and ethanol. This provides a competitive advantage to the Company and mitigates volatility and industry specific risks. Relatively lower sugarcane availability in MY20 and higher procurement cost has resulted in rising sugar prices in local market and led to better profits from sugar segment. The Company has displayed significant improvement in margins through support of distillery operations. It underwent capacity enhancement in MY19, expanding its distillery production capacity by 50,000 MT. Raw material supply remained constrained; however, strong demand for ethanol, during Covid-19, led to significant improvement in capacity utilization. Going forward, the Company aims to focus on improving efficiency through BMR. The financial profile of Noon Sugar remains adequate, characterized by improved working capital management, strong coverages and adequately leveraged capital structure. Sponsors support and strengthening the governance structure provides comfort to ratings.
The ratings are dependent on sustaining business margins, while maintaining strong financial risk profile. Any deterioration to topline, margins or cash flows will impact the ratings negatively. Meanwhile, improvement in capital structure will be favourable for the ratings.

About the Entity
Noon Sugar Mills Limited was incorporated in 1964 as a public limited company, with its shares listed on the Pakistan Stock Exchange (PSX). The primary business of the Company is manufacturing and sale of white refined sugar and Ethanol. Noon Sugar's registered office located on Sarwar Road, Cantt, Lahore, whereas, the mill is located in Sargodha. The Company has the capacity to crush 10,000 tons of sugarcane and can produce 130,000 liters of ethanol per day.

Majority shareholding of Noon Sugar Mills Limited lies with Noon family, who hold a 62% stake in the company. The family holds 57% directly through Ms. Tahia Noon and Mr. Salman Hayat Noon, whereas, 5% is held indirectly through Noon Industries limited, an associated company. Remaining shareholding is split between public institutions and the general public.

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.