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The Pakistan Credit Rating Agency Limited
Press Release

Date
02-Oct-20

Analyst
Faiqa Qamar
faiqa.qamar@pacra.com
+92-42-35869504
www.pacra.com

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PACRA Maintains Entity Ratings of SGM Sugar Mills Limited, Outlook "Positive"

Rating Type Entity
Current
(02-Oct-20)
Previous
(06-Nov-19)
Action Maintain Maintain
Long Term BBB- BBB-
Short Term A3 A3
Outlook Positive Stable
Rating Watch - -

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 190 per maund (previously PKR180). 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 improving business performance of SGM Sugar Mills Limited ('SGM Sugar' or 'the Company') and support of new sponsors. SGM Sugar has its mill located in Sindh with a crushing capacity of 8,000TCD. The Company has been acquired by 'United Group' of Essarani family. The family has long standing experience in agriculture sector and commodity trading including trading in fertilizer and coal, operating a sugar mill (Sindh Abadgar's Sugar Mills Limited) and ethanol distillery (United Ethanol Limited). Given the size of mill and steps taken by new management, a turnaround in operations is expected. Profit margins improved significantly on gross level on the back of relatively low conversion costs. The management's consistent attention to improve efficiencies supplements margins. The financial risk profile is characterized by moderate leverage and improved working capital cycle. The coverages have improved and remain adequate. Sponsors' commitment to provide financial support provides comfort to the ratings.
The ratings are dependent upon optimizing capacity utilization and achieving operational efficiency envisaged by the management. Any further improvement in margins and/or cashflows will positively impact the ratings.

About the Entity
SGM Sugar Mills Limited, a public unlisted company, was incorporated in Pakistan on September 11, 2007. 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, 17-KM, Jarwar Road, Ghotki, Sindh with a crushing capacity of 8,000 Tons per day.

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.
Post-acquisition, Mr. Deoo Mal Essarani has been appointed as the Chairman of the Company and his son, Mr. Asha Ram has been appointed as the CEO. However, 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.

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.