The Pakistan Credit Rating Agency Limited
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Usama Zahid Sarhandi

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PACRA Maintains Entity Ratings of Hunza Sugar Mills (Pvt.) Limited, Assigns Positive Outlook

Rating Type Entity
(03-Sep-21 )
(04-Sep-20 )
Action Maintain Maintain
Long Term BBB BBB
Short Term A2 A2
Outlook Positive 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 ~65–70mln MT. The industry is trying to overcome the supply challenges. However, support price, set by considering the cost incurred by farmers, remains a constraint. During MY21, the overall sugar production increased by 15%, YoY, to 5.6mln MT (MY20: 4.9mln MT) due to better crop availability and an increase in area under cultivation. The recent surge in local sugar prices was registered by the demand-supply gap. Previously, the sales tax levied on sugar was increased to 17% (previously 8%,) charged on the PKR 60/KG price, which contributed to higher prices. In the FY21 budget, a sales tax of 17% was proposed to be levied on the market retail price instead of PKR 60/kg. However, Government has allowed not to charge sales tax on market retail price till Nov-21. Moreover, in MY21 crushing season, the Government increased the support price of sugarcane to PKR 200 per maund (previously, it was increased to PKR 190 from PKR 180 per maund). Actual realized sugarcane prices at the mill gate were even higher. To meet the local demand and curb the hike in sugar prices, the Government planned to import 0.8mln MT of sugar. Out of this, 0.3mln MT has already been imported, till Jun-21. Lately, TCP approved to import another 0.1mln MT of sugar. Going forward, despite higher input costs, higher sugar prices are expected to remain favorable for millers.
The ratings reflect the Hunza Sugar Mills (Pvt.) Ltd ('Hunza Sugar' or 'the Company') diverse revenue stream (Sugar and Ethanol) and sponsors strong acumen. The Company remains exposed to volatility and ensuing challenges in the sugar sector. Higher cane prices resulted in rising sugar prices in the local market. Consequently, the Company earned significant profits from the sugar segment. The Company has a stable business profile and healthy margins owing to diversification despite volatile market conditions. Hunza Sugar's financial risk remains adequate owing to improved working capital management. However, capital structure remains significantly leveraged. Coverages have improved on the back of lower KIBOR. Moreover, sponsors' firm commitment to provide financial support in a timely manner provides comfort to the ratings.
The ratings are dependent upon the Company’s ability to maintain its margins, improve coverage's and rationalize short-term borrowings to avoid asset-liability mismatch. Any significant deterioration in margins and/or cash flows will impact the ratings negatively. Improvement in governance framework and internal controls will be favorable for the ratings.

About the Entity
Hunza Sugar Mills (Pvt.) Limited, is a private limited company, incorporated in 2002. Hunza Sugar manufactures refined sugar, molasses, ethanol and other allied products. Hunza Sugar has two sugar crushing units in District Faisalabad (Unit 1) and District Jhang (Unit 2) with a crushing capacity of 10,000 TCD and 10,000 TCD, respectively. In MY21, the Company has crushed 1,975,502 MT of sugarcane from its two units. Hunza Sugar has produced 172,949 MT of refined sugar in MY21, depicting an increase of ~25%. Distillery has a production capacity of 150,000 litres per day. The Company has produced 87,456 MT of molasses and ~14.8mln Ltr of ethanol.
The shareholding is vested with the families of three brothers Mr. Idrees Chaudhury (33%), Mr. Saeed Chaudhry (33%), and Mr. Waheed Chaudhry (33%). Mr. Idress Chaudhry is the Chairman of the Hunza Group of Industries while Mr. Saeed Chaudhry is the CEO of Hunza Sugar.

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.