The Pakistan Credit Rating Agency Limited
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Faiqa Qamar

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PACRA Maintains Entity Ratings of Jauharabad Sugar Mills Limited

Rating Type Entity
Action Maintain Maintain
Long Term BBB BBB
Short Term A2 A2
Outlook Positive Stable
Rating Watch - -

Pakistan’s sugar industry is the 2nd largest agro based industry, comprising 90 mills with annual crushing capacity estimated around 65 – 75 mln MT. In previous years, the industry was under pressure owing to a supply glut combined with a distortion in the support price mechanism. Additionally, a slowdown in international sugar prices made exports viable only through subsidy support. During MY19, prices improved in local market as inventory levels reduced. The overall sugar production also fell by 16%, YoY, to 5.5 mln MT on the back of lower crop availability. The government approved an export quota upto 1 MMT, however, no subsidy was announced, leading to low quantities availed. In the FY20 budget, sales tax levied on sugar was increased to 17% from 8%, charged on the price of PKR 60/KG. Moreover, sales to unregistered buyers have been disallowed and CNIC of all buyers must be maintained. Due to low crop availability in the crushing period ended Mar-20, sugar production is expected to be around 5-5.2 mln MT. The Government increased the support price of sugarcane to PKR 190 per maund (previously PKR180). Despite higher sugarcane costs, higher local sugar prices are expected to improve miller's profitability.

The ratings reflect an improving business profile of Jauharabad Sugar Mills Limited in line with the current dynamics of sugar industry. During MY19, rise in sugar prices in domestic market led to growth in the Company's revenue. Profit margins improved significantly on gross and net levels on the back of relatively low conversion costs. Over the years, the sponsors business acumen and support (in the form of loan) have remained beneficial for the Company. The management's consistent attention to improve efficiencies supplements margins. Going forward, the management plans to diversify the Company’s revenue base by setting up a power plant and a distillery. Jauharabad Sugar Mills financial profile remains stretched and is characterized by modestly leveraged capital structure, largely emanating from working capital needs. The coverage ratios have improved due to strong cash flows despite the rising finance costs.
The ratings are dependent upon the management’s ability to sustain margins while capitalizing on higher sugar prices. Meanwhile, close monitoring of working capital requirements remains critical. Any significant deterioration in the Company’s margins and/or coverages would have a negative impact. Improving financial transparency and related controls will be positive for the ratings.

About the Entity
Jauharabad Sugar Mills Limited is a public limited company, listed on Pakistan Stock Exchange since 1973. The Company was acquired from Saigol Group in Oct-13 by Cane Processing (Pvt.) Limited. The Company’s operational crushing unit, having sugarcane crushing capacity of 7,000 tons per day, is located in Jauharabad, Khushab District. The Company’s registered office is situated in Kot Lakhpat, Lahore. The Company is engaged in the manufacturing and sale of refined sugar and its by-products; molasses and bagasse.

Jauharabad Sugar Mills is majorly owned by a Holding Company - Cane Processing (Pvt.) Limited (64%) - and individuals of Latif family (12.11%). The family has effective shareholding of 76% in the company while the Company has a free float of more than 20%.

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.