PACRA Maintains Entity Ratings of Mehran Sugar Mills Limited

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.
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. The Company was able to increase sugar production during MY21 despite the low availability of cane. Resultantly, the cane was procured at a higher rate. 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 Limited’. The Company benefited from the share of profit from Unicol Limited during the current year. The ratings draw comfort from Mehran Sugar’s ability to maintain healthy topline and sizable short-term investment portfolio. The Company has mainly invested in the banking sector and other stable scrips to mitigate the investment risk. The Company’s financial risk profile is characterized by a moderately leveraged capital structure, adequate 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 adversely impact the ratings.

About the Entity
Mehran Sugar Mills Limited, established in 1965 is listed on Pakistan Stock Exchange. The Company is involved in the production and sale of sugar and ancillary products i.e molasses, bagasse and electricity. The Company has the capacity to crush 12,500 tons of sugarcane per day. The total sugar production during MY21's crushing season stood at 73,092 MT with a recovery rate of 10.71%.
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 Board is chaired by Mr. M. Kasim Hasham. The Company is headed by Mr. M. Ebrahim Hasham, the CEO, whereas, Mr. Ahmed Ebrahim serves as the Managing Director.