Earlier this month, Punjab’s third largest sugar mill announced its nine-month accounts on the bourse. And if there were a one-word summary for its performance, its “tragedy”.
According to Pakistan Bureau of Statistics, retail sugar prices in the country have increased by nearly 25 percent during last 12 months. Yet, mysteriously, Tandlianwala’s (PSX: TSML) top line has contracted by 29 percent since corresponding period last year. At a time when official quarters are claiming that the industry is guilty of abnormal profits, TSML’s nine-month financial snapshot is bleeding red under every head. What gives?
It would be one thing to offer a rationalization for margin attrition. The industry association claims that it has paid exorbitant rates for raw material cane procurement, as crop output fell to a five-year low last season. That makes across the board 7-8 percentage point drops in profitability margins comprehensible, if not likely (considering that selling price of sugar has also kept pace in tandem).
Dig further into the sales mix to unravel the mystery afoot. While industry critics allege that the milling sector is low-value adding and enjoys abnormal profits by rent-seeking, it appears not all mills are created equal. While bulk of revenue is drawn from white sugar sale, the company relies heavily on value-adding ethanol, and top gas (food-grade CO2) output for profitability.
While a natural explanation for a downturn in high-value exportable ethanol may blame Covid-19, the forces at play pre-date the global pandemic. Recall that ethanol production is dependent on availability of molasses, a by-product of sugarcane crushing cycle. In the past two years as cane crop has declined by nearly 20 percent from peak levels in MY18, molasses has run short in supply, as profitability has worsened due to higher procurement prices.
A look at PBS’ export performance scorecard for MY20 reveals that the company’s claims are not without substance. During full year MY20, unit prices fetched by exporters of molasses increased by 64 percent in rupee terms and 45 percent in dollar terms. Yet, despite attractive prices, export volume declined by almost 70 percent indicating supply scarcity.
That lends credence to industry’s claim that in absence of regulatory support, margins in the sugar milling segment are barely sufficient to maintain profitability in the green, especially give uncompetitive cane floor price compared to rest of the world.
Yet, with retail price of sugar looking set to score a century before year end, what will it take for the industry to achieve sustainable profitability without being dependent on clutches of regulatory dole outs?
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