PACRA Maintains Entity Ratings of SGM Sugar Mills Limited

The Pakistani sugar sector, recognized as the second most substantial agro-based industry within the nation, encompasses 91 mills with a collective processing capacity of roughly 80–90 million metric tons. The season ended with a sugar output of ~6.6 million tons, a ~16% decrease from the previous year’s ~7.9 million tons due to severe floods that damaged the crop and shortened the harvesting period. Despite the lower crop, the country had sufficient sugar stocks to meet the annual demand, owing to the large carryover from the previous year. Anticipated water scarcity is projected to precipitate a significant ~13.7% contraction in the forthcoming sugarcane supply for MY24, ascribed to a decrement in cultivated area and yield.
SGM Sugar Limited's credit rating remains steadfast with a stable outlook, a reflection of the company's strategic acumen and financial fortitude. In MY23, the company's revenue surged to PKR 9,185 mln, (MY22: PKR 5,119 mln), a testament to its ability to capitalize on favorable market trends and a significant recovery rate of approximately ~10%. The gross profit margin climbed to a significant 18.3% (MY22: 14.6%), while the net income rebounded to PKR 324 mln, marking a turnaround from the previous year's loss of PKR 102 mln. This financial upswing is supported by a shrewd management of inventory and a buoyant sugar price. Despite these positive developments, the rationale for maintaining the existing rating is anchored in a prudent approach to financial management. The company’s trade leverage has stretched further. SGM Sugar Limited’s financial resilience is apparent in its improved working capital cycle, with inventory days reduced to 90 (MY22: 141 days) and net working capital days at 85 (MY22: 116 days). With a leverage ratio carefully managed at ~60%, SGM Sugar Limited is well-positioned to navigate the anticipated headwinds of MY24, including a modest dip in crop yield and escalating production costs. The decision to uphold the rating encapsulates the company's robust financial risk profile is marked by a moderately leveraged capital structure, adequate coverage ratios, and effective working capital management, highlighting its fiscal savvy and strategic foresight.
The Company's credit standings are contingent upon its capacity to enhance profit margins, sustain strong cash flow, and maintain financial safeguards through unwavering financial discipline. An escalated focus on the rigorous administration of working capital is crucial. Any substantial deterioration in margins and/or financial safeguards would be considered a credit negative event.

About the Entity
SGM Sugar Mills Limited, a public unlisted company, was incorporated in Pakistan on Sep-07. It is engaged in the manufacturing and sale of crystalline sugar and ensuing by products. The Company operates a production plant located at Wallo Mahar, Ghotki, Sindh with a crushing capacity of 12,000 TCD.
The ownership structure is predominantly held by the Essarani Family, which possesses approximately 77% of the equity, while the Mehar Family retains the residual interest of approximately 23%. The Essarani Family’s acquisition of its majority stake transpired in May 2018, procured from the Dhabi Group and the Etihad Group. The governance of the company is presided over by Mr. Deo Mal Essarani, serving as the Chairman, and his progeny, Mr. Asha Ram, who fulfills the role of Chief Executive Officer. Notwithstanding, the pivotal responsibilities pertaining to executive management and strategic resolutions reside with Dr. Tara Chand Essarani, a distinguished member of the Board of Directors and sibling to Mr. Asha Ram.