Faran Sugar Mills Limited

One of the top five sugar mills with regards to production Faran Sugar Mills Limited (FSML) was established in 1981 and is a unit of the Amin Bawany Group of Companies. It is a public limited company and its operations are based out of Sheikh Bhirkio, District Hyderabad.
The company started commercial production in 1983, having cane crushing capacity of 3,000 tons per day. This capacity has subsequently been expanded to 8,000 tons per day. FSML has a diversified portfolio of customers including manufacturers of biscuits, ice cream, juices and syrups.
The company has invested in Unicol Limited, where industrial and fuel ethanol is produced on a vast scale. This unit is a joint venture of all leading sugar mills in the province of Sindh.
FINANCIAL ANALYSIS OF FARAN SUGAR MILLS LIMITED
Profitability
Successive increases in the price of sugar bode well for the company over the past three years. Sales revenue jumped by a hefty 60 percent in FY09, compared to the previous year's tally of Rs 1.504 billion to touch Rs 2.409 billion due to better sales volume and a surge in the selling price of sugar. In FY10 sales revenue increased further to Rs 3.990 billion, as prices of the natural sweetener continued to show strength.
But gross sales revenue for the first nine months of FY11 witnessed a decline of 11.68 percent in value, when compared to the same period of last year as demand growth appears to have been stymied by rising general price levels and stifled ability of consumers to spend.
However, all is not sweet for sugar mills and FSML is, obviously, no exception. Sugar prices have not risen in isolation. In effect, rallying prices of sugar cane; the basic raw material used in the manufacturing of the sweetener, are the main reasons behind rising sugar prices.
The cost of production for FSML has consistently been increased over the past three years, as prices of sugar cane have trended higher over this period. In FY09, the effect of rising prices of sugar cane was largely subdued as prices of sugar shot up rapidly and the recovery rate also witnessed a healthy improvement. But, this was not the case in the following year or two years. Prices of sugar cane went up largely in line with prices of sugar in FY09; while in FY10 sugar cane prices continued their upward spiral but international rates of the natural sweetener actually headed south.
The Company was able to increase its net earnings by 10.22 percent, moving from Rs 77.732 million in FY08 to Rs 85.676 million in FY09. In FY10, the Company was able to generate net profit of Rs 107.904 million as a result of an improvement in the recovery rate along with an increase in the sugar price in the final quarter of FY10. Significant stocks had been carried forward from the previous year and the Company was able to earn higher profits on these stocks after market rates had been increased considerably.
Even though cane prices continued to remain high, gross profit of the Company showed an improvement of 35 percent for the first three quarters of FY11. This was a result of favorable selling price of sugar along with carry-forward advantage of stock.
Liquidity
Management of FSML has been able to maintain a strong short-term liquidity position over the years. This can be seen by a consistently high current ratio value of 1.14, 1.17 and 1.15 for FY08, FY09 and FY10, respectively.
The quick ratio, which indicates the Company's ability to meet its short-term obligations with the most liquid assets, has been improved over the period since FY08. It was increased marginally from 0.23 in FY08 to 0.24 in FY09, jumping to 0.51 in FY10.
Debt Management
The Company has been successful in controlling its debt position. The Company fully paid off its long-term obligations, which amounted to Rs 19.644 million in FY08. All long-term projects are now financed through Islamic banks and internal cash generated by FSML.
There was an increase in the interest expense from FY08 to FY09 due to an increase in the borrowings to buy sugar cane coupled with higher rates charged for financing commodity operations. This high borrowing has caused this expense to continue its upward trend, amounting Rs 51.949 million in FY10.
Operational Efficiency
Despite low sugar cane production in FY09, the Company's production of sugar remained efficient. Its share of production in Sindh improved from 5.1 percent in FY08 to 6.5 percent in FY09. In FY10 there was sugar cane supply constraint, as a result of which production declined as compared with the previous year. However, the management's hard work is reflected in the fact that despite these challenges the Company continued to earn increasing profits. Fixed asset turnover ratio has also shown increase over the years from 2.91 in FY08, to 6.70 in FY10.
Market Value The earnings per share (EPS) for the Company have improved over the years since FY08 due to increased profitability of the Company. The EPS of FMSL was Rs 3.59 in FY08 and increased by 38.72 percent to Rs 4.98 in FY10.
Future Prospects The Company's management is prudently working towards the growth of the Company. It plans to continue to invest in BMRE project, which will benefit the Company and its stakeholders in long term. Recent decreases in prices of sugar are also expected to give way to more stable rates in the coming months. Availability of raw material in the form of sugar cane is also unlikely to be a constraint for the sugar mills during the months ahead.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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