PACRA Maintains Entity Ratings of SGM 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 has overcome the raw material supply challenges. However, support price of sugarcane, set by considering the cost incurred by farmers, remains a constraint. The Government increased the support price of sugarcane to PKR 250 per maund for mills operating in Sindh (previously, it was increased to PKR 202). Actual realized sugarcane prices at the mill gate were even higher. During MY21, the overall sugar production increased by 15%, YoY, to 5.7mln MT (MY20: 4.9mln MT) due to better crop availability and an increase in area under cultivation. Moreover, in FY21's budget, the Government proposed to levy 17% GST on market retail price instead of PKR 60/kg, after Nov-21. This led to an increase in sugar prices in the local market. To curb this, the Government planned to import 0.8mln MT of sugar. Out of this, 0.3mln MT was imported till Jun-21, whereas, 0.3mln MT was imported till Nov-21. During the current crushing season (MY22), a surge of 10-15% is expected in sugarcane production resulting in increased total sugar production of ~7mln MT. This along with high sugar prices is expected to remain favorable for the millers.
The ratings reflect a strong business performance of SGM Sugar Mills Limited ('SGM' or 'the Company'). The Company was acquired by 'United Group' of Essarani family, which 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 over the years. Margins remained strong at gross level on the back of favorable sugar prices. The management's consistent attention to improving efficiencies and to assure ample supply of sugarcane supplements margins. The financial risk profile is characterized by moderate leverage and a stable working capital cycle. The coverages have shown significant improvement and are in a strong position. Sponsors' commitment to providing 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 Sept-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 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. Deo Mal Essarani has been appointed as the Chairman of the Company and his son, Mr. Asha Ram has been appointed as the CEO. However, the 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.