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The Pakistan Credit Rating Agency Limited
Press Release

Date
23-Aug-21

Analyst
Shayan Farooq
shayan.farooq@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
(23-Aug-21)
Previous
(04-Sep-20)
Action Maintain Maintain
Long Term BBB BBB
Short Term A2 A2
Outlook Stable Stable
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) on the back of 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 202 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 local sugar prices are expected to remain favorable for millers.
The ratings reflect Sindh Abadgars Sugar Mills Ltd.'s ('Sindh Abadgars' or 'the Company') association with an established group in the agri and allied chain, and demonstrated support from its Sponsors. Sindh Abadgars has a modest business profile and relatively lower margins. The Company generates revenue from the sale of refined sugar and ensuing by-products: molasses and bagasse. The mill, located in Sindh, has a relatively adequate capacity of 8,000 TCD. Better crop availability, despite a lower recovery rate, led to increased production. However, high concentration of mills in adjoining areas led to a surge in sugarcane cost, and created a challenge for the Company. The Company has sufficient inventory levels to reap benefits from inflated sugar prices. This is expected to bode well for the Company's profitability. Lack of diversification exposes the Company to inherent volatility in the sugar industry. Financial risk profile of the Company is characterized by a high working capital cycle, dominated by high inventory levels and significant leverage, to finance working capital requirements. Coverages remain adequate. Likely group support, in case need arises, remains key rating factor.
The ratings are dependent upon improving margins and strict working capital discipline. The Company’s ability to sustain profitability while further strengthening coverage ratios remains critical. 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 sugar, along with its by-products. 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 remaining shareholding resides with Islamic Developmental Bank (9%), insurance companies (2.4%). Whereas, 10% stake is held by the general public. Dr. Tara Chand heads the Company as a 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.