PACRA Maintains Entity Ratings of United Ethanol Industries Limited

The assigned ratings affirm United Ethanol as an established player in Pakistan’s ethanol industry. A key contributing factor to the ratings is United Ethanol's affiliation with the well-established United Group, which holds a prominent presence in the country's sugar and related industries. The Company leverages its comparative advantage, stemming from the support of sugar mills (SGM Sugar Mills and Sindh Abadgar Sugar Mills) at the group level and its widespread geographical presence, resulting in a strong financial performance. The market risk the Company may face includes fluctuations in sugarcane yields and quality, influenced by agronomic conditions and cyclical variations in crop production. Additionally, raw material price volatility further accentuates operational uncertainty, necessitating adept supply chain and cost management. Global ethanol prices have remained demoted, driven by economic uncertainties on a global scale which ultimately stress the profitability matrix. The effect of falling international ethanol prices was further exacerbated by the dollar exchange rate. The Company also faced economic and operational challenges, including the complexities arising from the contrast between market-driven sugarcane prices and government-regulated rates. With the government's shift to deregulated pricing of sugarcane, the cost of goods sold is expected to decline moving forward, as prices are determined by market forces rather than fixed regulations. This transition to a market-driven pricing model will likely lead to more competitive pricing, encouraging efficiency and cost reduction across industries. However, this shift may introduce risks that could discourage farmers from cultivating sugarcane. On the financial profile side, United Ethanol derives its revenue from ethanol (~97% export market and ~3% local market). During MY24, the United Ethanol topline has reflected a ~22% YoY incline primarily due to increased ethanol exports. Despite this, local sales also showed resilience with a 19% YoY increase, driven by domestic demand. Profitability metrics showed an eroding performance, as gross margins declined due to high procurement cost of molasses. Similarly, operating margin also mirrored the same effect and decline resulting from high operating expenses mainly selling and administration. Meanwhile, net margins were also squeezed as a result of higher financing expenses in the context of a high-interest-rate environment. On the other side, leverage indicators continue to remain stable on account of the utilization of short-term borrowing predominantly consisting of the ERF- Part II. This financial resilience is further reinforced by robust coverages and effective management of working capital.
The ratings hinge on the management's adeptness in consistently preserving profit margins. It is imperative that the management exercises prudent debt management and ensures robust liquidity, as these factors play a pivotal role in determining the ratings. A substantial rise in debt, decline in coverages, will adversely affect the ratings.

About the Entity
United Ethanol Industries Limited is a public unlisted Company. Primary business activity of the Company involves manufacturing and sale of industrial grade ethanol. United Ethanol has a installed production capacity of 120,000 liters per day. The Company was incorporated in 2003, and is part of United Group. The Group entities include two sugar mills (Sindh Abadgar's Sugar Mills and SGM Sugar Mills), United Ethanol Industries Limited, Agro Trade Private Limited, United Agro Chemicals and, Synergy Packaging (Pvt.) Limited. The Essarani Family acquired the Company in 2016. Shareholding of the Company rests with Essarani Family. The Company is headed by Dr. Tara Chand, the CEO. He is ably supported by a team of experienced professionals.