Lahore, March 17, 2022 (PPI-OT): 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. Support prices of sugarcane, set by the Government considering the cost incurred by farmers, remains a constraint. 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. In the ongoing crushing season (MY22), total sugar production is expected above ~6mln MT.
In FY21’s budget, the Government proposed to levy 17% GST on market retail price instead of PKR 60/kg, after Nov-21. For MY22, the Government has increased the support price of sugarcane to PKR 225 per maund (previously, it was increased to PKR 200 from PKR 190 per maund). Actual realized sugarcane prices at the mill gate were even higher. To curb the hike in sugar prices, the Government planned to import 0.8mln MT of sugar.
In the ethanol segment, during MY21, exports stood at 183,856 MT in MY21 (MY20: 229,639 MT), dipping by ~20% due to higher molasses exports. The ethanol prices, internationally, have remained on the higher side. This, coupled with the devaluation of the Pakistani Rupee, has remained beneficial for domestic distilleries. Going forward, the margins for players operating in both sugar and ethanol segments are expected to remain stable owing to relatively higher sugar prices, locally, and ethanol prices, internationally.
The ratings reflect Hunza Sugar Mills (Pvt.) Limited’s (‘the Company’) substantial crushing capacity, diverse revenue stream (comprising local sugar sales and ethanol exports), and sponsors’ strong acumen. Despite volatility in the sugar segment and ensuing challenges, the Company has witnessed significant improvement in its financial performance in recent years. Higher cane prices resulted in rising sugar prices in the local market. Consequently, the Company earned significant profits from the sugar segment.
Similarly, the Company also benefited from the rising ethanol prices, internationally. The Company has stable business profile and healthy margins owing to diversification despite volatile market conditions. The Company’s financial risk remains adequate owing to improved working capital management. However, capital structure remains significantly leveraged. Coverages have improved on the back of higher free cash flows and increasing profitability. 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 healthy margins, improve coverages 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 favourable for the ratings.
For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com