PACRA Maintains Entity Ratings of SGM Sugar Mills Limited

The assigned ratings affirm SGM Sugar Mills Ltd. (‘SGM’ or 'the Company’) as an established player in Pakistan’s sugar industry. A key contributing factor to the ratings is SGM's affiliation with the well-established Deoomal United Group, which holds a prominent presence and a significant market share in the country's sugar and related industries. The group owns two sugar mills—Sindh Abadgar's Sugar Mills and SGM Sugar Mills as well as United Ethanol Industries Limited, Agro Trade Private Limited, United Agro Chemicals, and Synergy Packaging (Pvt.) Limited. The market risk 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 supply chain, and cost management. This, in turn, impacts profit margins. Due to the surplus stocks, the government has allowed the sugar millers to export ~0.79 million MT, ensuring liquidity relief for the industry. 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, SGM derives its revenue from sugar (~98% local market and ~2% export market). During MY24, the Company’s topline has reflected an incline of ~52.7% YoY, primarily due to increased sugar prices and sales volume. Sugar exports also provided a cushion in sustaining the growth. Profitability metrics showed an eroding performance, as gross margins declined due to the high procurement cost of sugar cane. Similarly, the operating margin also mirrored the same effect and decline resulting from high operating expenses. Meanwhile, net margins were also compressed as a result of increased financing expenses in the context of a high-interest-rate environment. On the other side, leverage indicators continue to remain moderate on account of the utilization of short-term borrowing. Governance and management continue to be critical strengths for the Company. Anchored by the Essarani family’s strategic oversight, the leadership team leverages decades of expertise to steer the Company through evolving industry dynamics.
The Company's credit standings are contingent upon its capacity to enhance profit margins, sustain strong cash flow, and maintain financial safeguards through unwavering financial discipline. An escalated focus on the rigorous administration of working capital is crucial. Any substantial deterioration in margins and/or financial safeguards would be considered a credit negative event.

About the Entity
SGM Sugar Mills Limited, a public unlisted company, was incorporated in Sep-07. 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, Ghotki, Sindh with a crushing capacity of 12,000 TCD. The ownership structure is predominantly held by the Essarani Family, which possesses ~77% of the equity, while the Mehar Family retains the residual interest of ~23%. The Essarani Family’s acquisition of its majority stake transpired in May 2018, procured from the Dhabi Group and the Etihad Group. The governance of the company is presided over by Mr. Deo Mal Essarani, serving as the Chairman, and his progeny, Mr. Asha Ram, who fulfills the role of Chief Executive Officer. Notwithstanding, the pivotal responsibilities pertaining to executive management and strategic resolutions reside with Dr. Tara Chand Essarani.