PACRA Maintains Entity Ratings of United Ethanol Industries Limited

The ethanol industry in Pakistan is predominantly export-oriented, primarily due to limited domestic consumption. The country experienced a notable increase in ethanol exports during MY23 compared to MY22. This growth can be attributed to increased molasses production and improved recovery rate. Global ethanol prices have remained elevated, driven by a surge in demand, despite economic uncertainties on a global scale. Positive demand dynamics of ethanol underpinned by increasing trend towards its blending with gasoline fuels in international market and export competiveness due to PKR devaluation has boded well for local industry players. The impact of high international ethanol prices was further amplified by the depreciation of the Pakistani Rupee. During MY23, Pakistan observed an improvement of about 3% in sugarcane production, contributing to stable profits for domestic distilleries. Looking ahead, it is anticipated that the industry's profit margins will maintain stability. However, it is important to note that raw material prices have also risen due to the elevated cost of molasses.
The ratings assigned to United Ethanol underscore its robust business profile, driven by strong profit margins and the export-centric nature of the ethanol industry. The company has achieved formidable margins at both the gross and operating levels, primarily attributable to the appreciation in prices and improved volume metrics. Recent years have been advantageous for the company, benefiting from factors such as molasses availability, heightened international demand, and favorable ethanol prices. During 9MMY23 company achieved a net profit of ~1.1bln a rise of ~8%. A key contributing factor to the positive ratings is United Ethanol's affiliation with the well-established United Group, which holds a prominent presence in the country's sugar and related industries. The company leverages its comparative advantage, stemming from the support of sugar mills at the group level and its widespread geographical presence, resulting in a robust financial performance. United Ethanol maintains a strong financial risk profile, characterized by moderate leveraging which stood at 35% and borrowings predominantly consisting of the ERF- Part II. This financial resilience is further reinforced by robust coverages and effective management of working capital. The company has successfully improved operational efficiency through the implementation of effective BMR strategies, yielding positive outcomes.
The ratings hinge on the management's adeptness in consistently preserving profit margins. It is imperative that the management exercises prudent debt management and ensures robust liquidity, as these factors play a pivotal role in determining the ratings. A substantial rise in debt, decline in coverages, will adversely affect the ratings. Concurrently, enhancing the governance framework is of paramount importance for maintaining favorable ratings.

About the Entity
United Ethanol Industries Limited (the Company) is a public unlisted company. Primary business activity of the Company involves manufacturing and sale of industrial grade ethanol. United Ethanol has a installed production capacity of 120,000 liters per day. The Company was incorporated in 2003, and is part of United Group. The Group entities include two sugar mills (Sindh Abadgar's Sugar Mills and SGM Sugar Mills), United Ethanol Industries Limited, Agro Trade Private Limited and United Agro Chemicals. The Essarani Family acquired the Company in 2016. Shareholding of the Company rests with Essarani Family. The Company is headed by Dr. Tara Chand, the CEO. He is ably supported by a team of experienced professionals.