PACRA Maintains Entity Ratings of Mehran Sugar Mills Limited

Pakistan’s sugar industry is the 2nd largest agro based industry after textile, comprising ~ 90 mills with annual crushing capacity estimated around 65 – 75 mln MT. It contributes about 0.6% to GDP and 2.9% of total value addition in agriculture. In previous years, the industry was under pressure owing to over supply combined with challenges in the support price mechanism. Additionally, a slowdown in international sugar prices made exports viable only through subsidy support. Government approved an export quota upto 1 MMT, however, no subsidy was announced. Consequently, zero exports were reported in August 2020 (August 2019: ~USD 5mln). During MY20, sugar production declined by ~9% YoY and clocked in at ~4.8MT (MY19: ~5.27MT), owing to reduction in the area under cultivation and water scarcity. Sugar prices improved in local market as inventory levels reduced. Due to low crop availability in the crushing period ended Mar-20. The Government increased the support price of sugarcane to PKR 192 per maund (previously PKR182). Actual realized sugarcane price at mill gate were higher. Despite increase in costs, higher local sugar prices have improved miller's profitability.

The ratings reflect Mehran Sugar Mills Limited's ('Mehran Sugar' or 'the Company') strong business profile emanating from a diversified revenue stream, robust governance and ability to post high recovery rates consistently, averaging in excess of 11% over the past five years. To mitigate risks associated with seasonality and volatility in the sugar industry, the Company’s profitability is supported through a strategic joint venture investment in ‘Unicol Limited’, an ethanol production company, and sale of electricity generation. The Company has made strategic investments in the FMCG sector through a joint-venture ‘UniFoods Industries Limited’ and in the energy sector through its wholly-owned subsidiary, ‘Mehran Energy Limted’. However, income from these avenues is not expected anytime soon. The ratings draw comfort from Mehran Sugar’s ability to maintain healthy topline despite volatility in the sugar industry and a sizable liquid investment portfolio. The investment portfolio remains exposed to market vicissitude, especially in current dynamics. The Company’s financial risk profile is characterized by a leveraged capital structure, strong coverage ratios and adequate working capital management.
The ratings are dependent on the Company’s ability to maintain strong cashflows and coverages while adhering to strict financial discipline, with an increased emphasis on working capital management. Any significant deterioration in margins and/or coverages will have a negative impact on ratings.

About the Entity
Mehran Sugar Mills Limited, established in 1965, is the flagship entity of Hasham Family ('Hasham Group'). The Company is involved in the production and sale of sugar and ancillary products i.e molasses, bagasse and electricity. It is listed on Pakistan Stock Exchange. Majority shareholding rests with Individuals of Hasham Family (75%); through families of three brothers; Mr. M. Kasim Hasham (28%), Mr. M. Ebrahim Hasham (28%), and Mr. M. Hussain Hasham (18%).

The Company is headed by Mr. M. Ebrahim Hasham who acts as the Chief Executive Officer, whereas, Mr. Ahmed Ebrahim serves as the Managing Director. The Board comprises ten members and is chaired by Mr. M. Kasim Hasham. There are three independent directors on the Board.