The Pakistan Credit Rating Agency Limited
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Shayan Farooq

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PACRA Upgrades Entity Ratings of SGM Sugar Mills Limited

Rating Type Entity
Action Upgrade Maintain
Long Term BBB BBB-
Short Term A2 A3
Outlook Stable Positive
Rating Watch - -

Pakistan’s sugar industry is the country's 2nd largest agro-based industry, comprising 90 mills with an annual crushing capacity estimated ~65–70mln MT. The industry is trying to overcome the supply challenges. However, support price, set by considering the cost incurred by farmers, remains a constraint. During MY21, the overall sugar production increased by 15%, YoY, to 5.6mln MT (MY20: 4.9mln MT) due to better crop availability and an increase in area under cultivation. The recent surge in local sugar prices was registered by the demand-supply gap. Previously, the sales tax levied on sugar was increased to 17% (previously 8%,) charged on the PKR 60/KG price, which contributed to higher prices. In the FY21 budget, a sales tax of 17% was proposed to be levied on the market retail price instead of PKR 60/kg. However, Government has allowed not to charge sales tax on market retail price till Nov-21. Moreover, in MY21 crushing season, the Government increased the support price of sugarcane to PKR 200 per maund (previously, it was increased to PKR 190 from PKR 180 per maund). Actual realized sugarcane prices at the mill gate were even higher. To meet the local demand and curb the hike in sugar prices, the Government planned to import 0.8mln MT of sugar. Out of this, 0.3mln MT has already been imported, till Jun-21. Lately, TCP approved to import another 0.1mln MT of sugar. Going forward, despite higher input costs, higher sugar prices are expected to remain favourable for millers.

The ratings reflect improved business performance of SGM Sugar Mills Limited ('SGM' or 'the Company'). The Company was 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 profitability is visible. Margins remained strong at gross level on the back of favourable sugar prices. The management's consistent attention to improve efficiencies and to assure ample supply of sugarcane supplements margins. The financial risk profile is characterized by moderate leverage and improved working capital cycle. The coverages have shown significant improvement and are at a strong position. Sponsors' commitment to provide financial support provides further comfort to the ratings.
The ratings are dependent upon optimizing capacity utilization and achieving operational efficiency consistently by the management. Deterioration in margins and/or cashflows will negatively 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 12,000 Tons per day. Sucrose recovery rate stood at 9.9% during the crushing season of MY21.
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. 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.