Noon Sugar Mills Limited

Noon Sugar Mills (PSX: NONS) was incorporated in 1964 as a public limited company and is listed on all stock exchanges of Pakistan. The principal activity of the company is manufacturing and sale of white sugar. The sugar mill is located in Bhalwal tehsil of district Sargodha, a small town in the fertile region between Chenab and Jhelum rivers, in Central Punjab.

Ownership structure

It is widely understood that Malik Hayat Khan Noon family owns the majority stake in the company, given sponsor family’s representation on the board of directors. However, against industry standard, the company has not shared the break-up of director-wise shareholding, aggregating total shareholding held with directors at close to 59 percent or three-fifths of the board. An additional 4.64 percent is held with a related party whose details are also not shared in the Pattern of Shareholding section of the annual report, as is norm for publicly listed company. Most curiously, 8.7035 percent shareholding (which comes under significant shareholding of more than five percent as per SECP rules) is held with a foreign company/ies; however, details of the same are not disclosed.

Business activities

The plant went into production in 1966, with an installed capacity of 1,500 MT sugar cane processing per day, which was raised to 4,000MT per day by 2002. Production capacity was further enhanced to 9,000 MT per day in 2007.

The company also installed a distillery of French origin, which was setup by 1986 with a production capacity of 50,000 liters per day. The facility was enhanced by 30,000 LPD for industrial grade ethanol fuel in 2002, followed up by addition of 100,000 LPD new plant based on molecular sieve technology added in the year 2005.

An effluent treatment plant employing Canadian technology of ABV bio-gas reactors was installed in 1997, to use its bio-degradable waste water as a renewable source of energy.

Regional dynamics

Sargodha division of Punjab is located near the historical north-western border between the Jhelum and Indus rivers. Mills in the district have historically recorded an average level of sucrose yield as the climatic conditions are less suitable for sugarcane cultivation compared to southern Punjab and northern Sindh districts.

As a result, average sucrose yield recovery recorded by mills in the province during the past five marketing years is close to 9.27 percent, 73 basis points lower than national average. This in turns reflects in the profitability of the mils in the region, as increased need for raw material requirement in turn eats into contribution margin.

Historic overview

The director’s report section of company’s accounts notes that government’s delay in issuing export permissions depressed demand for sugarcane as the country has very high excess carryover stock as production during MY17 clocked in at 7 million tons against annual domestic consumption of 5 million tons. This adversely affected sugarcane farmers; as millers held out on raw material purchasing waiting for the price to come down.

Moreover, decline of white sugar price in global commodity market coupled with bumper crop during harvest season for MY18 indicate that price will remain depressed as the market adjusts to excess supply.

Production performance

Noon Sugar Mills was able to break through its declining market share that begun in MY13 and continued for the four consecutive seasons. While total output declined on a year-on-year basis, volumes seem to have stabilised near hundred thousand tons per annum, from a mere one third witnessed just two years ago.

The expansion in market share however was not accompanied by a recovery in sucrose levels, which remains primarily a function of mills location in a low sucrose yield region, as explained above. While several mills in Punjab have petitioned to relocate their units the more fertile southern region, regulatory hurdles abound. Therefore, due to low per maund sucrose yield, contribution margin per ton of raw material consumed is expected to remain lower than industry average in coming years.

Note that industry average is heavily skewed specially since southern Punjab belt of Bahwalpur division has concentration of large size mill units, whereas units in central Punjab are usually mid-size.

Financial analysis

Sales grew on the back of improved off take as the company was able to capitalise on the back of export subsidy announced by the outgoing PML-N government in its final year. This improved sugarcane off take in anticipation, in the hopes of galvanizing the coveted kissan vote.

As a result, sugar segment exports touched 12 percent of total value from sugar segment, from nil just the previous year. Compared to other companies, however, Noon Sugar has followed the convention of cumulating accrued subsidy of Rs159 million into gross sales amount. Ethanol division continued to contribute a crucial one-fifth of top line, all of which is from export sales due to low demand of ethyl alcohol in domestic market.

However, due to poor sucrose yield, gross margin recorded decline of half percentage points. Support from efficient overhead management allowed margin to remain stable at core operations level with additional support from other income recorded on gain on exchange rate. However, close to four percentage points or half of EBIT was eroded to financial cost, which rose in the aftermath of steep discount rate rise. PBT remained in the range of three percent, up 38 bps from the previous year.

Industry outlook

The crushing season in the country has begun with a delay of two months, in first week of December 2018. As notified support price in Sindh remained unchanged at Rs180 per 40 kg, crop size is expected to be 25 percent lower than last year.

Due to the fiscal pressures at the center, the new government at the center has refused to offer subsidy on export; however, it has increased export quota to 1.1 million tons. However, in the absence of subsidy, export volumes have remained diminished, with total exports for 9MFY19 clocking in at 377,677 tons, against 1.01 million tons exported during the same period last year. Per ton export price in dollar terms has also declined, from average price of $360 per ton fetched last year to $305 per ton during the ongoing period. While industry expected respite in export following announcement of subsidy by government of Punjab for Rs5 per kg of export in January 2019, same seems to not have begun to reflect in monthly export numbers so far.

LSM data from PBS indicates that sugar production has recorded a year-on-year decline, owing to lower crop output in the kharif season ending November 2018. While full year sugar production could ultimately pick up owing to delayed start of crushing, chances are slim as provisional crop surveys indicate over 20 percent decline in sugarcane harvest in the southern region.

While the country will continue to witness a sugar glut, its extent will be limited, which has already begun to reflect itself in retail price of sugar. As Ramazan season begins, retail price of sugar has touched Rs70 per kg in urban centers such as Islamabad and Karachi, up from average Rs53 per kilo during last year.