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The Pakistan Credit Rating Agency Limited
Press Release

Date
04-Sep-20

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

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PACRA Maintains Entity Ratings of Sindh Abadgars Sugar Mills Limited

Rating Type Entity
Current
(04-Sep-20)
Previous
(16-Sep-19)
Action Maintain Initial
Long Term BBB BBB
Short Term A2 A2
Outlook Stable 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 over supply combined with challenges in the support price mechanism. Additionally, a slowdown in international sugar prices made exports viable only through subsidy support. During MY19, the overall sugar production fell by 16%, YoY, to 5.5 mln MT on the back of lower crop availability. Sugar prices improved in local market as inventory levels reduced. 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, contributing to higher prices. Due to low crop availability in the crushing period ended Mar-20, sugar production is around 5-5.2 mln MT. 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 are expected to improve miller's profitability. Local prices are expected to be capped due to lower international prices (making imports viable) and potential intervention by the Government.

The ratings reflect the Company's association with an established group in the agri chain and demonstrated support of it's sponsors. Sindh Abadgars Sugar Mills (Sindh Abadgars) has a modest business profile and relatively lower margins in the Sugar industry. The Company generates its revenue from the sale of refined sugar and it's ensuing by-products, molasses and bagasse. The mill, located in Sindh, has a relatively adequate capacity of 8,000 TCD. Timely BMR activities to enhance efficiency and yielded stable recovery rate of ~10.5%. However, lower crop cultivation and high concentration of mills in adjoining areas led to lower production levels and remains a challenge for the Company. Sindh Abadgars held on to stock during 3QMY20. This is expected to bode well for the Company's profitability as sugar prices have increased significantly. Lack of diversification exposes the Company to inherent volatility in the sugar industry. The financial risk profile is characterized by a high working capital cycle, dominated by sugar stocks and moderate leveraging, to finance working capital requirements. Coverages, a function of the Comany's business activity and leveraging, remain adequate. Likely group support, in case need arises, remains key rating factor.
The ratings are dependent upon increasing utilization, while improving margins and strict working capital discipline. The Company’s ability to sustain profitability while further strengthening coverage ratios remains imperative. Any significant deterioration in business performance and/or financial health will negatively impact ratings.

About the Entity
Sindh Abadgars is a public listed company. Primary business activity of the Company involves manufacturing and sale of food and industrial grade ethanol. The Company was incorporated in 1984, and was formerly owned by the Effendi Group. The Essarani Family acquired the Company in 2005. Major shareholding of the Company rests with Essarani Family (79%). The Company is headed by Dr. Tara Chand, as Chief Executive Officer.

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.