Sugar industry – prospects not that compelling given ground realities but exports offer good avenue
There is a tug of war going on between growers who had forced government in both Punjab and
Sindh province to increase support prices to Rs 170/kg to Rs 172/kg per 40kg wherein ex?mill
prices remain at around Rs 50/kg which means there is minimal margins left for mill owners; thus
making their prospects not that compelling at this point. However, we see better fundamentals in
JDWS, MRNS, HABSM, MIRKS and improvement in NONS (see earnings matrix on the following page).
Only trigger in the industry is the allowing of exports for which sugar players would jostle.
Sugar industry dynamics: much the same as it was decade ago
Sugar cane is one of the vital cash crops in Pakistan and second largest agro?based industry in Pakistan.
Pakistan is overall a fifth largest producer of sucrose. At present, the total mill production from Pakistan is
close to 3.1mn tons (output of 81sugar mills) wherein 2.6mn tons is sold out (showing 40% growth from last
year). As per newspaper reports, the Economic Coordination Committee (ECC) has allowed sugar mill owners
to export sugar (previously the quota was allocated at around which is now been converted into unlimited
exports). It further states that TCP has been asked to create a buffer of 0.5mn tons of sugar for the smooth
local consumption and supply populace in order to avert FY11 like crisis situation where prices of sugar
reached to unimaginable proportions wherein Supreme Court intervened; that was the time when sugar mills
made windfall profits.
In all sugar cane is an important crop which yields not only sucrose but in the same process (on the conveyer)
also produces higher margin products such as industrial alcohol for pharmaceutical companies (mostly
exported to European destinations such as Germany), ethanol as fuel and waste such as bagasse which is sold
out to local paper mills.
Sugar production emanates from all the provinces (mostly from Punjab and Sindh). However, most recovery
(crushing rate) comes from Punjab based mills i.e. more than 11%. But Pakistan’s average recovery rate is
stated to be 9.4%. Hence it is a kind of benchmark that the company having better recovery rate has the
highest proportion of margins.
Sugar cane support prices vis?à?vis sugar prices; mill owners would suffer in FY13
There is a concept of support prices both in Punjab and Sindh province. For instance, in FY10 Govt. of Punjab
had fixed price of Rs 100/kg over a 40kg bag. However in FY12, the support prices have increased to Rs 150 –
154/kg over a 40kg bag (latest reported as per 9 month accounts reported). As of November 2012, as per press
reports, Sindh Agriculture Department has rejected any possibility of reduction in official fixed price of Rs
172/kg per 40kg of sugar cane despite severe confrontation from mill owners. Same thing happens in Punjab.
Only last week, sugar production has started in Pakistan. As for the wholesale sugar price, it is ranging around
Rs 50/kg. As per industry people, the real cost of producing sugar (bearing in mind Rs 170/kg per 40kg sugar
cane price) is Rs 65/kg but it’s being available at Rs 50 – 51/kg (the prices could go as high as Rs 54/kg). But this
whole situation does not sound compelling for sugar companies in current financial year.
This means that government owing to political expediencies such as general elections would like to keep
growers happy by increasing support prices of sugar cane wherein sugar mill owners wouldn’t be able to
pass on the sugar prices to general public in early part of the 2013. Later on there is a likelihood that prices
of sugar could increase at the whims of sugar mills. Hence sugar outlook looks murky.
Molasses sales increased from Pakistan
In FY11, nearly 2mn tons of molasses was produced (mostly exported) as against 1.5mn tons in FY10. Till
9MFY12, we have seen increasing trend of molasses exports in major companies (also depicting good margins
since distillery prices hiked globally), however, now these prices have shown a decreasing trend. Molasses and
ethanol offers greater margins over sucrose yet constitute minimal part of segment wise sales.
Valuation: JDWS, MRNS, HABSM, MIRKS are better players; NONS has shown improvement
JDW Sugar is always been considered best company in terms of efficiencies (crushing recovery)
and progressive management; however, we signal a cautious stance given a situation where
companies may face tough months before elections. Among emerging players, NONS looks
attractive (offers greater free float of over 10mn shares).