Looming debt crisis of non-diversified mills

BR Research September 6, 2019

Monetary tightening has never been a friend to industries in private sector. But it appears that the latest round of double-digit interest rates may prove especially brutal for the sugar milling sector.

At least 9 out of 31 listed sugar mills recorded a negative debt servicing coverage ratio (DSCR) in their latest financial year ending September 2018. Additional five mills had a DSCR ratio barely in green, at less than 0.25 times on average.

Is there any common feature to sugar mills facing debt repayment challenges? On surface, the poor performers include firms from all geographical location and varying capacities, and it appears difficult to set laggards apart from leaders.

But in order to understand what is holding the laggards back, look towards what’s common between the leaders. Mills such as Shakarganj, Noon, Mehran, and Chashma, while belong to different geographical regions and have recorded various levels of sucrose recovery and share of exports in total sales, all of these mills have greater revenue diversification as a result of in-house capacity to process by-product molasses into ethanol. Recall that food-grade ethanol is an annual five-hundred-dollar export industry, with an average contribution margin of over fifty percent.

Mills with negative debt servicing capacity also have a preponderance of ST debt as a percentage of total debt and are on average small-sized units with less than 10,000 TCD capacity; however, with some exceptions

If small-sized sugar mills do end up going under as a result of high debt servicing cost, time may be ripe for large players to usher another phase consolidation in the industry. The recent acquisition of Baba Farid by Thal group hints that the tailwinds are already blowing in that direction.

Source: Annual reports, 2018. Note: Mills excluded: Tandlianwala, FY17 financials unavailable; and JDW: for illustrative purposes (DSCR 0.50x and capacity 44,000TCD). TCD: Crushing capacity per day in tons.

Copyright Business Recorder, 2019
 

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