The Pakistan Credit Rating Agency Limited
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Faiqa Qamar

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PACRA Maintains Entity Ratings of Chanar Sugar Mills Limited

Rating Type Entity
Action Maintain Initial
Long Term BBB- BBB-
Short Term A3 A3
Outlook Stable 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 modest business profile of Chanar Sugar Mills Limited with relatively small crushing capacity of 4,800 tons per day. The sponsors have sound understanding of the business and have been proactive in improving efficiencies. The Company's topline posted a declining trend during 9MMY20, due to subdued demand emanating mainly from corporate customers. However, low sugarcane availability in MY20 and higher procurement cost has resulted in rising sugar prices in local market resulting in better profits for the millers. Moreover, the Company remains exposed to inherent cyclical nature of the sugar industry as the revenue stream lacks diversification. The Company has developed a leveraged capital structure. Financing needs mainly emanate from prolonged working capital cycle. The Company has long term loans to finance BMR and group projects. The rating incorporate irrevocable and unconditional guarantee, to secure cost overruns of the project, given on behalf of its associated company. This may further stress the existing cashflows as coverages remain stretched.
The ratings are dependent upon the management’s ability to improve revenues while sustaining the margins. Meanwhile, close monitoring of working capital requirements remain critical for the ratings. Any further deterioration in the Company’s cashflows and/or coverages would have a negative impact on the ratings.

About the Entity
Chanar Sugar was incorporated as a public limited company in 1990. Primary business activity of the Company involves manufacturing and sale of sugar and its by-products molasses, bagasse and mud. The Company’s crushing unit, having sugarcane crushing capacity of 4,800 tons per day, is located in Tandianwala, district Faisalabad. While, the registered office is situated in Muslim Town, Lahore.

Chanar Sugar’s ownership resides with the sponsors, the Kayani Family, through individual family members. The Company and its Board is headed by Mr. Javed Ahmad Kayani.

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.