Lahore, March 16, 2023 (PPI-OT): Pakistan’s sugar industry is the country’s second largest agro-based industry, comprising of 90 mills with an annual crushing capacity estimated at~ 80-90mln MT. Despite overcoming the challenge of raw material supply, the industry is facing a constraint due to the government-set support price for sugarcane, which is determined based on the cost incurred by farmers.
During MY22, the support prices for sugar cane in Punjab were fixed at PKR 230/maund and PKR 250/maund in Sindh. Actual realized sugarcane prices at the mill gate were even higher. During MY22, the overall sugar production increased by 9%, YoY, to 7.1mln MT (MY21: 6.5mln MT) due to better crop availability and an increase in area under cultivation. Subsequently, sugar prices witnessed ~12% decrease.
During the current crushing season (MY23), loss of area un-der cultivation of roughly 4.7% amidst flash floods; the forecast of sugar production is affected and is estimated to be ~7mln MT.
However, the carry-over stock from MY22 and the expected sugar production during MY23 are likely to result in a surplus of local sugar production. Therefore, the Government has allowed exports of 0.25mln MT based on production during MY22. The support prices have been fixed at PKR 300/maund for Punjab and PKR 302/maund for Sindh.
Although low sugar prices locally and increased sugarcane prices have prompted many sugar mills to close the crushing early in MY23, sugar exports are expected to be favourable for the industry, ensuring liquidity remains intact. The ratings reflect Hunza Sugar Mills (Pvt.) Limited’s (‘the Company’) substantial crushing capacity, diverse revenue stream (comprising local sugar sales and ethanol exports), and sponsors’ strong acumen.
Despite volatility in the sugar segment and ensuing challenges, the Company has witnessed significant improvement in its financial performance with a growth of 7.4%. Higher cane cost has led to rising sugar prices in the local market during MY22.
Consequently, the Company earned significant profits from the sugar segment. Similarly, the Company also benefited from the rising ethanol prices, internationally. The Company has stable business profile and healthy margins owing to diversification despite volatile market conditions.
The Company’s financial risk remains adequate owing to improved capital structure supported by enhanced equity base. Moreover, sponsors’ firm commitment to provide financial support in a timely manner provides comfort to the ratings.
The ratings are dependent upon the Company’s ability to maintain healthy margins, improve coverage’s and rationalize short-term borrowings to avoid asset-liability mismatch. Any significant deterioration in margins and/or cash flows will impact the ratings negatively. Improvement in governance framework and internal controls will be favourable for the ratings.
For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com
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