sugar sector - pacra

Sugar SectorAn Overview

December 2020©The Pakistan Credit RatingAgency Limited

OMC | Global MarketTable of Contents

Global Industry Pg NoFood & Fuel 1Production Process 2Production & Consumption 3Production Share | Country Wise 4Consumption Share | Country Wise 5Exports & Imports 6Local Industry Pg NoIndustry Position 7Industry Snapshot 8Sugarcane Cultivation & Production 9Sugarcane Utilization 10

Sugarcane Prices 11Sugar Production & Consumption 12

Local Industry Pg NoSugar Prices 13CCP Enquiry Report 14Market Shares 15Business Margins 16Cost Structure | Sugar Mills 17Financial Risk | Working Capital Management 18Borrowings & Interest Costs 19Sugar By-Products 20Sugar Crop Cycle 21Porter 5 Forces 22SWOT Analysis 23Regulatory Framework 24Rating Curve 25Conclusion | Outlook 26

OMC

Source: FAO,ISO

Sugar | Global Overview

Food & Fuel

1

Approximate Produce from 1

ton of sugarcane cut

120 Kg Sugar

38 Kg Molasses

36 kg Filter Mud

250 kg Bagasse

60 kg Straw

100 kg Tops

According to International Sugar Organization (ISO) “"Sugar" means sugar in any of its recognized commercial forms derived from sugar cane or sugar beet, including edible and fancy molasses, syrups and any other form of liquid sugar, but does not include final molasses or low-grade types of non-centrifugal sugar produced by primitive methods.”

Sugarcane is a crop primarily grown in tropical countries.

It serves as a source of food and is a key biofuel feedstock (ethanol).

Sugarcane supplies ~86% of the globe’s sugar (the remaining coming from beet).

~75% of the sugarcane produced globally is consumed by the food manufacturing sector and households; the balance is used in biofuel production.

Sugarcane cultivation and processing currently provide employments for 100 million people across the world.

Harvested Cane Crushing-Milling

Bagasse

Liming, Heating & Clarification

Raw Juice

Thin Juice

Evaporation

Sugar | Global Overview

Production Process

Crystallization

Molasses

Raw Sugar

Distillation

Ethanol

Source: SUCDEN, ISO 2

OMC Sugar | Global Overview

The Fall of Production & Consumption

3Source: USDA, World Bank

World Sugar Balance-mln TonsPeriod MY15 MY16 MY17 MY18 MY19 MY20World Opening Stock 44.8 48.8 44.1 42.0 49.5 49.2World Production 177.6 164.9 174.0 191.8 179.7 166.2World Imports 50.2 54.7 54.2 53.7 52.5 50.7Total World Sugar Supply 272.6 268.4 272.2 287.5 290.3 266.1Less:World Exports 55.0 54.0 58.7 63.1 62.8 54.1World Consumption 168.9 170.3 171.5 174.9 178.3 170.8World Closing Stock 48.8 44.1 42.0 49.5 49.2 41.2

• Global Sugar sector experienced an overall production and consumption decline during MY20* due to the outbreak of Covid-19 pandemic.

• Historically, world production and consumption have increased at a CAGR of ~1.5% and ~1.4%, respectively, from MY15 to MY19.

• During Covid-19 crisis, due to worldwide imposed lockdowns, sugar production witnessed an annual decline of ~11.7% in MY20. Global consumption also reduced by ~4.2% in MY20.

• Thailand experienced ~43.2% decline in its production. India faced ~15.7% decline and USA had ~10.9% production fall.

• Given the economic recovery due to eased lock down situations in the world, it is estimated that global production of sugar may rebound by ~13.1% and consumption may grow by ~3.6% in MY21.

*MY refers to “marketing year” – Brazil & China MY is “April to March”, India, USA & Pakistan MY “Oct-Sep”

320330340350360370380390400410

Jun'20 July'20 Aug'20 Sep'20 Oct'20 Nov'20 Dec'20

Global | Average Sugar Prices/Ton-USD


Brazil and India|Largest Share of the Pie


• Asia is the largest sugar producing region of the world with a share of ~38.2% in MY20 (~38.9% in MY19).

• In terms of countries, Brazil held the largest share in production, ~18.0% , in MY20 (18% in MY19). However, over the years Brazil’s share has reduced by ~2.0% with India gaining.

• In MY20, due to extended lockdown amid COVID-19 pandemic, the entire value chain of India’s sugar crop has been disrupted. India’s production of sugar reduced by ~15.7%.

• According to the Indian Sugar Mills Association (ISMA), nearly INR 0.7bln has been stuck in unsold sugar and ethanol inventories in sugar mills, the demand for ethanol has also fallen due to the severe dip in fuel consumption. These elements have knocked the cash flow of sugar mills and impaired their ability to pay cane farmers. Moreover, shortage of labor and critical inputs like lime, sulphur, packaging material and other related challenges has led to reduced production of sugar in India.

• Nonetheless, it is estimated that India’s production may recover again in the coming year by ~16.7%.

Sugar Production SharePeriod MY15 MY16 MY17 MY18 MY19 MY20

Asia:India 17.2% 16.6% 12.8% 16.9% 18.0% 17.4%China 6.2% 5.5% 5.3% 5.3% 5.7% 6.1%Thailand 6.1% 5.9% 5.8% 7.2% 7.5% 5.0%Pakistan 3.5% 3.9% 4.3% 4.3% 3.6% 4.0%Other Asia 3.6% 3.7% 4.2% 3.7% 4.2% 5.6%Total Asia 36.6% 35.7% 32.4% 37.4% 38.9% 38.2%South America:Brazil 20.2% 21.0% 22.5% 20.3% 18.2% 18.0%Other South America 4.6% 4.4% 4.3% 3.8% 3.9% 3.5%Total South America 24.8% 25.5% 26.8% 24.1% 22.1% 21.5%North America 8.0% 8.9% 8.4% 7.7% 7.8% 7.7%Central America 3.2% 3.3% 3.2% 3.0% 3.0% 3.0%Europe 10.9% 9.0% 11.0% 11.4% 11.2% 10.8%Former Soviet Union 3.9% 4.6% 5.3% 5.1% 5.1% 6.4%Oceania 2.8% 3.1% 3.0% 2.6% 2.7% 2.6%Other Regions 9.7% 9.9% 9.9% 8.7% 9.2% 9.9%Total World 100% 100% 100% 100% 100% 100%

*MY refers to “marketing year” – Brazil & China MY “April to March”, India & USA & Pakistan MY “Sep-Aug”


Biggest Sweet Tooth


-10.00%

-5.00%

0.00%

5.00%

10.00%

MY15 MY16 MY17 MY18 MY19 MY20

Population & GDP VS Sugar Consumption

World Sugar Consumption Growth World Population GrowthWorld Real GDP Growth

• Sugar consumption, GDP and Population are directly proportional to each other.

• Top 5 sugar consuming countries accounted for ~51.9% of total global consumption in MY20(~52.2% in MY19).

• India is the largest sugar consuming country with a share of ~14.0% in MY20(~15.4% in MY19).

• India witnessed the highest decline in its total consumption (local plus exports) due to extended lock-down and decline in exports i.e. by~13.1%.

15.7% 15.7% 14.9% 15.2% 15.4% 14.0%

11.1% 11.0% 10.9% 10.7% 10.5% 10.6%

11.7% 11.2% 10.8% 10.9% 10.7% 10.6%

9.2% 9.3% 9.1% 9.0% 8.8% 8.9%6.5% 6.4% 6.5% 6.5% 6.4% 6.4%

45.8% 46.4% 47.8% 47.8% 48.1% 49.5%

0%

20%

40%

60%

80%

100%

MY15 MY16 MY17 MY18 MY19 MY20

Global Sugar Consumption Share

India EU South America China USA Others

Top 5 Sugar Consuming Countries-mln MTPeriod MY15 MY16 MY17 MY18 MY19 MY20

India 26.5 26.8 25.5 26.5 27.5 23.9EU 18.7 18.7 18.7 18.8 18.8 18.0South America 19.8 19.0 18.5 19.0 19.1 18.2

China 15.6 15.8 15.6 15.7 15.7 15.2USA 10.9 10.9 11.2 11.3 11.5 11.0Grand Total-Top 5 91.5 91.2 89.5 91.3 92.6 86.3Other Countries 77.4 79.1 82.0 83.6 85.7 84.5Total World Consumption 168.9 170.3 171.5 174.9 178.3 170.8



World Trade Share

6Source: World Bank

0%

20%

40%

60%

80%

100%

MY18 MY19 MY20

Global | Sugar Exports Share

Brazil Thailand India Australia Guatemala Mexico EU Others

0%

20%

40%

60%

80%

100%

MY18 MY19 MY20

Global | Sugar Imports Share

Indonesia China USA Bangladesh Algeria Malaysia UAE Others

• Brazil, the largest producer, is also the highest sugar exporting country with a share of ~35.7% in MY20 (~35.0% in MY19), followed by Thailand with a share of ~19.8% in MY20 (18.9% in MY19).

• Based on World Bank’s forecast, World Trade is expected to boost post lockdown. Brazil’s exports are expected to increase by ~46% in MY21 from ~19.3mln MT in MY20 to ~28.3mln MT in MY21. Thailand is expected to witness an increase of ~3% in MY21 from ~10.7mln MT in MY20 to ~11.0mln MT in MY21.

• Indonesia and China are the largest importers of sugar with a share of ~7.9% in MY20 (~10.5% in MY19) and ~8.1% in MY20 (~8.0% in MY19), respectively.

• Overall exports and imports are expected to increase by ~20.5% in MY21, post lock-down.


OMC | Global Market

Source: PBS

Sugar | Domestic Overview

Economy Overview | Sugar Industry Position

7

“Important Crops” | Composition-Output Period FY15 FY16 FY17 FY18 FY19 FY20Important Crops 100% 100% 100% 100% 100% 100%Food Crop:Wheat 38.6% 42.2% 41.0% 37.7% 39.2% 40.0%Maize 8.8% 10.1% 11.0% 10.3% 12.9% 13.5%Rice 12.5% 12.9% 12.3% 13.1% 13.8% 14.1%Total Food Crops 60.0% 65.3% 64.2% 61.1% 65.9% 67.6%Cash Crop:Sugarcane 12.1% 13.5% 14.5% 15.6% 13.5% 13.3%Fibre Crop:Cotton 28.0% 21.2% 21.3% 23.2% 20.7% 19.0%

Economy

Agriculture(19%)

Crops (35%)

Top 5 Important

Crops (63%)

Sugarcane (13%)

Other Crops (37%)Others(65%)

Manufacturing(19%)

Sugar(6%)

Services(62%)

• Sugarcane is an important industrial and cash crop of Pakistan. It contributes ~13% to the “important crops” and ~8% to the overall crop output of the country.

• Sugarcane crop alone contributes ~0.71% to the country’s GDP (~0.84% in FY19).

• Sugar Industry consist of ~6% of the manufacturing sector.• In Pakistan, sugarcane is largely grown in the province of

Punjab. Area under cultivation has increased lately due to favorable crop conditions. In Punjab, it increased by ~20.7% in 1QFY21 from SPLY, in Sindh by ~1.0% from SPLY, while, it declined slightly by ~0.8% in KPK from SPLY.

64.4%

25.5%

10.1%

Province Mix | Cultivated Area FY19

Punjab Sindh KPK

64.9%

25.2%

9.9%

Province Mix| Cultivated Area FY20

Punjab Sindh KPK

OMC

Source: PSMA,CCP,SBP

Sugar | Domestic OverviewIndustry Snapshot

8

Price Elasticity of DemandPeriod FY16 FY17 FY18 FY19 FY20Elasticity 0.6 0.3 0.3 0.01 0.08

Sugar MillsProvinces No. of Sugar Mills Operational

Punjab 45 89%Sindh 38 84%KPK 7 85%Total 90 87%

Industry Summary

Period FY19 FY20

No. of Sugar Mills 89 90

No. of Listed Mills 28 29

Sugarcane Cultivated Area-mln Hec 1.1 1.0

Sugarcane Production-mln MT ~67 ~67

Sugarcane Utilization Rate ~74.1% ~71.8%

Domestic Sugar Production-mln MT ~5.2 ~4.9

Domestic Sugar Consumption-mln MT ~5.2 ~5.3

Total Crushing Capacity-mln MT ~70,000 ~70,000

Average Mill Crushing Capacity-Tons/Day ~6000 ~6000

Recovery Rate 10.4% 10.1%

Domestic Market Revenue-PKR ~406bln ~440bln

Contribution to GDP ~1.1% ~1.1%

Regulatory BodyProvincial

Government, CCPProvincial

Government, CCP

Association PSMA PSMA

• Pakistan has two planting seasons for Sugar Crop: (1)Spring (Feb-Mar) and (2) Autumn (Sep-Nov). Harvesting for each season is conducted after 8-10 months of plantation.

• Punjab and Sindh plants cane in both the seasons, while, in KPK, plantation is carried out in the autumn season only.

• Cane yield for the month of September (Spring crop) is higher than the other season.

• Sugar is defined as “basic commodity” by Essential Commodity Act 1957. Being an essential need and having very less substitutes makes sugar’s demand inelastic. Pakistan sugar industry provides direct employment to ~1.5mln people and indirect employment to ~9mln people.

OMC | Global Market

Source: PBS,USDA,IRSA


Sugarcane Profit Potential Pulls Farmers Away From Cotton.

9

Sugarcane Cultivation Area & ProductionPeriod FY15 FY16 FY17 FY18 FY19 FY20Pakistan Cultivated Area-mln Hec 23 23 22 22 22 22Area Under Sugarcane as a Percentage of Total Cultivated Land

4.9% 5.0% 5.5% 6.1% 5.0% 4.7%

Sugarcane Production- mln Tons 63 65 75 83 67 67

• Over the past 5 years, sugarcane crop has witnessed two opposing trends on an average basis; decline in area under cultivation, and increase in overall production. While cultivated area reduced at a CAGR of ~1.8% from FY15-FY20 , the sugarcane production has increased at a CAGR of ~1.3% over the last five years. Major reason is attributed to increase in yield/hectare which rose by ~3.2% in the same tenure.

• COTTON: During April’20, farmers of Punjab and Sindh decided to switch cotton crop with sugarcane, due to sugarcane’s better productivity and resistance to climate fluctuations. Many local farmers reported ~60% lower yield of cotton due to inconsistent temperature, and increasing cost of production and pesticides. Thus, sugarcane production is likely to increase in FY21.

• In FY19 specifically, the production levels of sugarcane declined to ~67mln tons from ~83mln tons in FY18, a fall of ~19%; the same production levels were retained in FY20. nevertheless, yield per hec increased to ~64,308kgs/hec in FY20 (~60,956kgs/hec in FY19). Sugarcane is a water intensive crop; the yield mainly increased as Pakistan witnessed a rainfall that was ~41% above normal levels in FY20. Moreover, the irrigation supply in Indus Basin was also adequate.

55,062

57,897

61,972 62,09660,956

64,308

50,000

52,000

54,000

56,000

58,000

60,000

62,000

64,000

66,000

FY15 FY16 FY17 FY18 FY19 FY20

Sugarcane Yield Trend | KG/Hec

OMC | Global Market

Source: PSMA,PBS


Sugarcane | Province Composition & Crushing

10

0%20%40%60%80%

100%


Province Mix | Sugarcane Production

Punjab Sindh KPK

Sugarcane Utilization by Factories/Millers

Period FY15 FY16 FY17 FY18 FY19 FY20

Sugarcane Crushed (mln Tons) 50.8 50.1 71.2 65.7 49.8 48.2

Sugarcane Utilization 80.9% 76.4% 94.4% 78.8% 74.1% 71.8%

0.0%20.0%40.0%60.0%80.0%

100.0%120.0%

Punjab Sindh KPK

Province Mix | Sugarcane Utilization

FY19 FY20

• On provincial level, Punjab has the highest producing area of sugarcane with a share of ~64.3% in FY20 (~66.8% in FY19), followed by Sindh with a share of ~23.5% in FY20 (~24.8% in FY19).

• CRUSHING & UTILIZATION: Sugarcane crushing decreased at a CAGR of ~1.0%, while sugarcane utilization by sugar millers decreased at a rate of ~2.3% over the last five years.

• While Punjab has the highest cultivated area for sugarcane, Sindh has the highest utilization. In FY19, Sindh sugar mills utilized ~104.9% of the sugarcane crushing capacity as market share of sugar mills located in Sindh increased.

OMC

Source: PBS


Sugarcane Prices | A High Value Cash Crop

11

Sugarcane Minimum Prices (at factory gate)-PKR/40KGPeriod FY15 FY16 FY17 FY18 FY19 FY20 FY21Punjab 180 180 180 180 180 190 200Sindh 182 172 180 180 180 192 -KPK 180 180 180 180 180 190 -

• Minimum Price levels for sugarcane are set by the respective provincial governments, considering the cost of production to farmers.

• As of Oct’20, the Government of Pakistan (GoP) has set sugarcane price at PKR~200/40KG for the new crushing season 20/21. Punjab government has thus made the decision to raise the prices as per Federal government’s decision. The decisions by KPK and Sindh’s government are still pending as to date.

• Overall sugarcane crop value has increased at a CAGR of ~2.4% over the last five years (FY15-FY20). Due to low yields and production in FY19, sugarcane crop value declined substantially to PKR~302bln from PKR~375bln in FY18 – a fall of ~19% in line with the production fall.

283295

340

375

302319

200

220

240

260

280

300

320

340

360

380

400


Sugarcane Crop Value- PKR bln

Regional Countries Sugarcane PKR/40KgPeriod FY18 FY19 FY20

India-INR 198 220 250

Bangladesh-TK 130 160 190

Source: CCP,USDA


Sugar Production & Consumption

12

Sugar Production & Consumption Statistics- mln TonsPeriod FY15 FY16 FY17 FY18 FY19 FY20Opening Stock- A 1.2 1.1 1.1 2.8 2.9 2.2Production- B 5.2 5.1 7.1 6.6 5.2 4.9Availability- A+B= C 6.4 6.3 8.2 9.4 8.1 7.1Domestic Consumption- D 4.6 4.9 5.1 5.2 5.2 5.3Exports- E 0.64 0.27 0.28 1.34 0.63 0.07Closing Stock- C-D-E 1.1 1.1 2.8 2.9 2.2 1.8

.0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


Sugar Recovery Rate-(Sugar Produced/Sugarcane Crushed)

Punjab Sindh KPK Overall Industry

• Pakistan’s annual sugar consumption hovers in the range ~5-5.5mln tons. • Domestic sugar consumption has increased at a CAGR of ~2.9% from FY15

onwards. Along with local consumption, some portion of sugar output is also exported. Since prices served in the Export market are more competitive, the risk that Sugar Millers may prefer Export over local sales is mitigated by the Government (GoP) through setting a sugar export quota of around 1-1.1 mln MTs.

• In terms of Sugar recovery rates, Sindh tops the provinces. Recovery rate of Sindh(~10.6%) is greater than that of Punjab(~9.8%) as Thatta region is ideal for sugarcane production due to its humid environment and higher water retention rate.

• In consequence of a recent attempt to create artificial shortage of sugar for better prices (by the Sugar Millers – cartel), the GoP had decided to import ~0.3mln Tons of sugar in the country in order to meet the local demand. Till Oct’20, around ~0.15mln tons of sugar has already been imported.

4.00

4.50

5.00

5.50

6.00


Sugar Total Consumption

Total Sugar Consumption-mln MT

Domestic Consumption Imports

Source: CCP


Price Trend

13

.

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY15

FY16

FY17

FY18

Dec'

18

Jan'

19

Feb'

19

Mar

'19

Apr'1

9

May

'19

Jun'

19

Jul'1

9

Aug'

19

Sep'

19

Oct

'19

Nov

'19

Dec'

19

Jan'

20

Feb'

20

Mar

'20

Apr'2

0

May

'20

Jun'

20

Jul'2

0

Aug'

20

Sep'

20

Ocr

'20

FY19 FY20 1QFY21

Domestic | Average Sugar Retail Price

Avg.Sugar Retail Price-PKR/KG Percentage Change (RHS)

• The graph above shows prices of sugar in Pakistan. Average price per kg was PKR~100/kg. • However, price spiked as high as to PKR120/Kg during a few days at the end of August’20.

Over the last 3 years, sugar retail prices were rapidly increasing due to shortage of sugar supply in the country. In FY20, the GoPdecided to import ~0.3mln MT of sugar due to its portrayed scarcity in the market, despite sugarcane being abundantly grown in Pakistan. Resultantly, the CCP conducted an Inquiry in this regard report of which was issued on Oct 21, 2020.

CCP Findings:• Sugar industry in Pakistan and its state of competition.• Existence of collective dominance or any anti-competitive strategy.• Collective decision by sugar mills for not supplying sugar to tenders floated by USC or any form of bid rigging.• Players’ decision to cease crushing of sugarcane during crushing season 2019-20.

CCP Conclusion:• As per CCP, Pakistan Sugar Mills Association aided cartels among its members not only to protect inefficient mills but also

keep the commodity’s prices high.• Over the last 22 months prices have been artificially increased by~66.8%.• PSMA was maintaining an illegal balance between sugar mills with variant cost structures.

Source: CCP


CCP Enquiry Report

14

.

Source: CCP, PACRA Database


Fragmented Market

15

Market Share as per Installed CapacitiesPeriod FY20JDW 14%Hamza 6%Shakarganj 5%Almoiz Group 3%RYK 3%Tandlianwala 3%Etihad 3%AKT 3%Chashma 3%Sheikhoo 3%Deharki 3%Layyah 3%Two star Kamalia 2%Hunza 2%Madina 2%Fatima 2%Indus 2%Alnoor 2%Ashraf 2%Habib 2%Other Players 32%Total 100%

• Pakistan has 90 sugar mills currently operative in the country. Top 5 of them, however, account for ~28% of the market share.

• Listed companies primarily dominate the market.

• Top market players are mainly owned by political groups.

Top 5 Sugar Mill Location

JDW Pujab,SindhAlmoiz Group Punjab,KPK

RYK Punjab

Tandlianwala Punjab,KPKShakarganj Punjab,KPK

*MY period Sep-Aug

Source: PACRA Database


16

19.8%

16.4%

12.5%12.4%

14.1%

9.3%8.1%

4.9%4.2%

6.7%

0.7%2.2%2.0%

1.0%

3.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

9MY20MY19MY18MY17MY16

Profitability Margins

Gross Profit Margin Operating Profit Margin Net Profit Margin

• Pakistan’s sugar market size increased to PKR~440bln in FY20 (PKR~406bln in FY19), up ~8% YoY majorly due to price change. Demand for sugar remains largely price inelastic due to sugar being one of the essential food items. The country’s total sugar demand hovers in the range from 5-5.5mln tons per year.

• Even during the outbreak of Covid-19 pandemic, sugar demand was one of the least impacted in the country as it is a main food item. The industry was also included in the ‘exception list’ for continuity of operations during lockdown. It did, however, face a slight set back on the demand during complete lockdown days due to closure of restaurants.

• As sugar prices have increased on a step up basis by the millers in MY20, their profitability margins have also improved. Gross profit margin for 9MY20 clocked in at ~19.8%(~16.4% in MY19) and operating margins recorded at ~9.3% for 9MY20(~8.1% in MY19).

• However, net profit margins of the Industry reduced to ~0.7% in 9MY20(~2.2% in MY19) due to increase in financial costs (resulting from an increased policy rate of ~13.3% in MY20).

*MY period Sep-Aug*Weighted Average of Top 30 Players

Business Risk | Margins

Source: CCP


Business Risk | Cost Structure Disparity

17

• The Sugar Industry is subject to variant cost structures due to different recovery ratios of cane type, technology used economies of scale, conversion cost and purchase price of sugarcane. Due to this, even mills located in the same area may have different cost structures.

• Most highly efficient mills are the ones which have maximum recovery ratio and other economies of scale due to larger capacity and better technology. The inefficient mills are the ones with obsolete technology, low recovery ratios and high conversion cost.

• Sugar recovery rates vary from ~8% to 12%.

• In Pakistan the cost of cane varies from 65% to 96% of the cost of production of sugar for different mills, which demonstrates an excessively high share of sugarcane - often with low sucrose content.

• The Industry shows a considerable variation in terms of obtaining cane yield levels and value addition.

Sugar Mills Cost Disparity-PKRProvince Minimum Price/Kg Maximum Price/Kg Disparity

Punjab 43.6 78.6 80.3%Sindh 47.2 66.7 41.3%

FactoryCrushing Capacity-

metric TonsCost of Sugar-

PKR/KgRecovery

Cost of Cane-

PKR/Kg

Component of Cane in Total Cost

JDW Sugar Mills 4,620,000 46.96 11.29% 40.08 85%Hamza Sugar Mills 2,940,000 49.29 10.82% 41.58 84%Al Moiz Industries 2,290,000 57.06 10.60% 42.21 74%Thal Industries 2,208,000 64.86 10.19% 45.14 70%Macca Sugar Mills 1,485,000 97.27 9.03% 49.84 51%Noon Sugar Mills 1,400,000 56.95 10.01% 43.95 77%Sindh AbadgharSugar Mills

1,280,000 54.32 10.78% 45.71 84%

Shakaranj Sugar Mills

1,268,000 67.76 10.13% 44.42 65%

Khairpur sugar mills 980,000 55 9.81% 46.38 84%Adam Sugar Mills 826,000 66.41 8.91% 51.62 78%Chanar Sugar Mills 768,000 65 9.50% 50.29 77%Pattoki Sugar Mills 68,964 56.95 8.21% 54.81 96%

*Data as per FY20



Financial Risk | Working Capital Management

18

0

50

100

150

200


Working Capital Cycle

Inventory Days Trade Receiveable Days

Trade Payable Days Net Working Capital Cycle

3.4

2.73.12.8

1.7

0.0

1.0

2.0

3.0

4.0


Current Ratio

• Inventory levels of sugar mills are at its peak during the crushing season i.e. Dec-Feb and Apr-May. As soon as Pakistan hits summer season-June, the sales start to boost(cold drinks and beverages) and inventory levels begin to reduce.

• Net (average) working cycle condition of sugar industry increased over the last five years. Inventory days increased to ~161 days for the period 9MY20(~102 days in MY19) from ~69 days in MY16.

• Restrictions on export by government contributed to increase in inventory levels during May20-Jun20.

• Trade receivable days have also increased to ~50 days in 9MY20(~35 days in MY19).Trade Payable days improved to ~76 days in 9MY20(~53 days in MY19).

• As a result net working cycle has experienced a rise to ~136 days in 9MY20(~102 days in MY19).

• One of the major reason for increased working capital cycle is Covid-19, which impacted payments.

• Due to increase in working capital requirements, industry’s short term financing has augmented.

• Current ratio has improved to ~3.4 times in 9MY20(~2.7 times in MY19). However, this may be a sing of inefficient management of industry’s current assets.




Financial Risk | Borrowing & Interest Costs

19

3.4

2.42.02.2

2.9

0.0

1.0

2.0

3.0

4.0


Interest Coverage

10.6%

12.9%

7.2%

10.0%

15.3%

10.9%11.9%

6.5%

8.9%

6.1%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%


Average Cost of Borrowing

Avg Cost of Borrowing Avg KIBOR

66.8%63.0%65.2%64.9%49.2%

68.2%72.5%69.4%61.7%

39.7%

0.0%20.0%40.0%60.0%80.0%

100.0%


Borrowings

Total Borrowing/(Total Borrowing + Equity) Short Term Borrowing/Total Borrowing

• Sugar Industry total borrowing book clocked in at PKR~1,845mln as at June’20 (PKR1,643mln – June’19) up ~13% YoY basis.

• The Industry is highly leveraged. Borrowings to Equity increased to ~66.8% in MY20(~63.0% in MY19). Total Infection ratio (Non-Performing Loans) of sugar industry increased to ~3.8% in CY19 from ~2.0% in CY18. For 1HCY20 NPLs stood at ~2.5% of the Borrowing Book (~2.0% SPLY).

• Despite increase in financial costs, interest coverage showed a sign of improvement to ~3.4 times in 9MY20(~2.4 times in MY19) due to increased margins resulting in higher free cash flows available.

• Average cost of borrowing rose from~7.2% in MY18 to ~12.9% in MY19. For 9MY20, average borrowing cost was recorded as ~10.6%. This is expected to reduce with the policy rate cut by 625 bps.


Source: CCP, PACRA Database


BY-Products

20

Molasses & Ethanol Production-mln MTPeriod FY15 FY16 FY17 FY18 FY19 FY20*Molasses Production 2.2 2.2 3.1 3.0 2.2 2.1Less: Export 0.1 0.1 0.1 0.2 0.1 0.1Molasses Available for Ethanol 2.1 2.1 3.0 2.8 2.1 2.0Ethanol Produced 0.6 0.6 0.8 0.8 0.6 0.6Ethanol Exported 0.3 0.3 0.3 0.6 0.4 0.4

Bagasse and Mud Production-mln MTPeriod FY15 FY16 FY17 FY18 FY19 FY20Bagasse 1.48 1.46 2.07 1.91 1.45 1.40Mud 1.52 1.50 2.14 1.97 1.49 1.45

• Average recovery rate for molasses is ~4% of the sugarcane crushed.

• Average recovery rate for ethanol is ~28% of molasses.• Recovery rates for bagasse and mud are ~2.91% and ~3%,

respectively.• Pakistan has a total ethanol production capacity of ~3,075 MT

per day.• Ethanol prices and margins are heavily dependent upon cane

yield.• Ethanol Industry is highly exposed to rupee fluctuation in

terms of exports as ~50%-60% of ethanol produced in Pakistan is exported.

Top 5 Ethanol Producers

Madinah GroupShakarganj

TandlianwalaShahmurad

Unicol

0.4 0.42

0.33 0.33 0.36

0.51

0

0.1

0.2

0.3

0.4

0.5

0.6


Global Average Ethanol Prices- USD/Ltr

• Low sugar production

• Low sugar availability

• Increase in Sugar Prices

• Improved Profitability

• Prompt payments to farmers

• Low cane arrears

• Increase in area under Cultivation

• Higher cane production

• Higher cane for sugar

3-4 Years

• Higher sugar production

• Higher sugar availability

• Decrease in sugar prices

• Lower Profitability

• Delayed payment to farmers

• High cane arrears

• Decrease in area under cultivation

• Lower cane production

• Lower cane for sugar

2-3 Years


Sugar Sector Cycle Nutshell

• Farmers in Pakistan have very limited power. Their cash cycle is mainly influenced by large sugar mills.

• Even in the current scenario of price spurs and high profitability margins, many farmers are paid much less than the minimum price levels set by the government.

• Payments of farmers are long deferred by some of the strong sugar mills.

21

• Medium level of threat

• No governments restrictions on entry

• Cost of entry relatively low

• Many inefficient mills operating in market

POTENTIAL NEW ENTRY

• Low power• Consumers will

purchase, no matter what the price levels are

• Possibilities and history of producer cartels

BUYERS

• Low threat of substitutes(artificial sugar)

• Basic Necessity

SUBSTITUTES

• Large number of suppliers(farmers)-Limited power

• Farmers are protected through minimum price policy of government

• Farmers tend to easily switch between crops if they do not find favorable terms

SUPPLIERS

• High Rivalry• ~90 Players• No differentiation

on price basis• Differentiated on

the basis of quality, availability and delivery

COMPETITIVE RIVALRY


Porters 5 Forces Model

22

Sugar | Domestic OverviewSWOT Analysis

• Excessive regulation and control by government• Vulnerable to political interest• Unhealthy competition and cartels• Changing climate patterns due to global warming• PKR devaluation leading to declined export margins• High level of competition• Varying quality of seeds and cane• Production of sugarcane decreases the productivity

of land

• Growing population and food consumption• Value added by- products• Export market potential due to produced

surpluses.• High potential to increase yield and recovery

ratios• Pakistan GDP recovery and reduced finance

costs leading to opportunities for investment• Development of value chains• Reduced corporate tax rates

• Lack of research and development initiative and outdated technology with farmers

• Lack of proper knowledge and training to farmers• Water management problems and small holding of

land by farmers• Lack of proper recycling systems• Low Yield and recovery ratios and varying cost of

sugarcane to mills• Inefficient plants running

• Availability of land and raw material• Low cost skilled and unskilled labor• Suitable weather for crop yield• Profitable crop due to government incentives• Large domestic market with increasing demand• Influence on government policies• Simple to operate plants• High crushing capacity

Strengths Weaknesses

ThreatsOpportunity

23

Source: CCP,SBP,GOP


Regulatory Framework

24

• Export Policy Order, 2016• 2018, ECC allowed 1.1 mln metric tons of export quota• 2020, Removal of Sales Tax on imported sugar supply by TCP

Federal Government

• Sugar Act 1934 – Price regulation of sugarcane• Sugar Factory Control Act 1950- regulation of sugarcane supply and price to factories• Punjab Sugarcane Control Order 1972- regulating and prohibiting the movement, transport, supply, distribution and use or consumption

of sugarcane and trade and commerce therein.• Punjab Foodstuff Act 1958- continuance of powers to control the supply, distribution and movement of, and trade and commerce in,

foodstuffs in Punjab.• Sindh Foodstuff (Control) Act 1958 – an enactment made in public interest to provide for the continuance of powers to control the

supply, distribution and movement of, and trade and commerce in, foodstuffs in Sindh.• Price Control and Prevention of Profiteering and Hoarding Act 1977 – an enactment to provide for price control and prevention of

profiteering and hoarding.• Punjab Registration of Godowns Act 2014 – an enactment to register godowns, provide for a comprehensive system regarding stable

supply and availability of essential articles, and deal with ancillary matters.

Provincial Government

•Control over non-competitive strategies of the producers.•Competition Act 2010ns that regardless of whether the sugar industry is heavily regulated by the provincial governments, it is still

susceptible to being monitored by the CCP. Not only can the sugar mills and other private parties be looked at by the CCP, governmental bodies, such as the Sugarcane Control Board, can also be monitored.

Competition Commission

Sugar| Domestic OverviewRating Curve

Source: 25

A+ A A- BBB+ BBB BBB-Pacra 1 0 3 2 3 2VIS 0 2 11 1 0 0

0

2

4

6

8

10

12

No.

of R

atin

gs

Rating

Pacra VIS

• PACRA rates 11 players.• PACRA covers ~9% of the market

share in terms of revenue.

Sugar | ConclusionOutlook: Stable

Source: Agriculture Committee, Business Recorder 26

Sugar Production Forecast-mln MTSensitivity Analysis Cane Utilization RateSugar Recovery Rate 75.0% 80.0% 90.0%9.5% 54 57 6410.0% 56 61 6810.5% 60 64 72

• On the pricing front, it is expected that sugar prices will not soar as they have been doing since 2018. Current sugar price is around PKR~97/Kg. The price may reduce further to PKR80/Kg, given the impact of CCP’s Inquiry and increased supply expected in MY21. While GoP has set a target of Import quantum for the year, local prices already trade at a discount to the Imported sugar price. This is why, no significant impact is expected on local prices.

• Listed Companies(all in consensus) are predicting a crop surplus for MY21 and the overall Industry is looking at an output level greater than that of MY20 season.

• Resultantly, sugar production may increase up to ~12% which may lead to increased exports. Sugar export quota is, however, expected to remain stable at 1.1 mln MT.

• Another reason for increased production is expected because of farmers’ preference being shift from cotton crop to cane crop.• Data from IRSA and SUPARCO reveals that both irrigation water and rainfall has remained satisfactory throughout the Indus basin.• However, fertilizer offtake data has not portrayed any substantial increase growth. This does not point towards a lower yield, but it signals out that

the cane yield may not exceed the 10 years average of ~60ton/Hec.• It is estimated that sugarcane production will increase by 21.18% in Punjab, 0.53% in Sindh, 0.14% in KPK.• Sugar consumption is expected to grow at a rate of ~5% over the next marketing year.• The Country’s ending stocks as at June’20 were ~1.8 mln MT of sugar as per June’20 with an average price of ~PKR90/kg and average cost of

~PKR61/kg.

*Analysis as per Agriculture Committee Meeting OCT’20

Sugar | BIBLIOGRAPHY

• World Bank• United Stated Department of Agriculture (USDA)• Pakistan Bureau of Statistics (PBS)• Business Recorder• State Bank of Pakistan (SBP)• Pakistan Stock Exchange (PSX)• Pakistan Sugar Mills Association (PSMA)• Competition Commission of Pakistan (CCP)• Statista.com• PACRA in-house Database

DISCLAIMERPACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is notguaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not berelied upon as professional advice.

ResearchTeam

SaniyaTauseefAsst. [email protected]

Aimen [email protected]

Contact Number:+92 42 35869504

27

mailto:[email protected]

sugar sector - pacra

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