PACRA Maintains Entity Ratings of SGM Sugar Mills Limited

Pakistan’s sugar industry is the country's 2nd largest agro-based industry, comprising 90 mills with an annual crushing capacity estimated ~ 80–90mln MT. The industry has overcome the raw material supply challenges, lately. However, support price of sugarcane, set by the Government considering the cost incurred by farmers, remains a constraint. During MY22, the support prices for sugar-cane in Punjab were fixed at PKR 230/maund and PKR 250/maund in Sindh. Actual realized sugarcane prices at the mill gate were even higher. During MY22, the overall sugar production increased by 9%, YoY, to 7.1msln MT (MY21: 6.5mln MT) due to better crop availability and an increase in area under cultivation. Subsequently, sugar prices witnessed ~12% decrease during MY22 compared to the preceding year. Furthermore, the Government has allowed exports of 0.5mln MT considering the surplus sugar production in the country. During the current crushing season (MY23), loss of area under cultivation of roughly 4.7% amidst flash floods; the forecast of sugar production is affected and is estimated to be ~7mln MT. The support prices have been fixed at PKR 300/maund for Punjab and PKR 302/maund for Sindh. Low sugar prices locally, and increased sugar-cane prices has led to the closure of several mills. However, sugar export, is anticipated to be favorable for millers.
The ratings reflect a strong business performance of SGM Sugar Mills Limited ('SGM' or 'the Company'). The Company was acquired by 'United Group' of Essarani family, which has long standing experience in agriculture sector and commodity trading including trading in fertilizer and coal, operating a sugar mill (Sindh Abadgars Sugar Mills Ltd.) and ethanol distillery (United Ethanol Ltd.). Given the size of mill and steps taken by new management, a turnaround in profitability is visible over the years. Margins remained strong during MY22 owing to better sugar prices despite increased procurement costs. However, during the ongoing MY23, the financial performance could potentially witness slight dip owing to high procurement costs and local prices challenge. The management's consistent attention to improving efficiencies and to assure ample supply of sugarcane supplements margins. The financial risk profile is characterized by moderate leverage and a stable working capital cycle. However, coverages have stretched further. Sponsors' commitment to providing financial support provides comfort to the ratings.
The ratings are dependent on optimizing capacity utilization and achieving operational efficiency consistently by the management. Deterioration in margins and/or cashflows will negatively impact the ratings.

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.
Majority shareholding (~77%) lies with the Essarani Family while remaining (~23%) is held by the Mehar Family. Essarani Family has acquired its share in the Company during May-18 from Dhabi Group and Etihad Group. Mr. Deo Mal Essarani has been appointed as the Chairman of the Company and his son, Mr. Asha Ram has been appointed as the CEO. However, the key responsibility for managerial oversight and decision-making rests with Dr. Tara Chand Essarani who is a director on the Board and is Mr. Asha Ram’s brother.