Shakarganj Limited

Shakarganj Limited (PSX: SML) was incorporated in Pakistan as a publicly listed company in 1967. The company is in the business of transforming renewable crops such as cotton and sugarcane into value-added products such as textiles, refined sugar, biofuel, building materials, etc. SML also supplies bio-power generated from biogas to the national grid. The company has its head office located in Lahore with its two production facilities in the Jhang District. SML is also a holding company of Shakarganj Food Products Limited (SFPL), one of the leading producers of fruit and dairy products.

Pattern of Shareholding

As of December 2024, SML has a total of 125 million shares outstanding which are held by 1365 shareholders. The local general public has the majority stake of 34.78 percent in the company followed by other local companies holding 30.13 percent shares. Associated companies, undertakings, and related parties account for 29.93 percent shares of SML while NIT & ICP hold 4.58 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-2024)

SML’s topline expanded until 2022 followed by a decline in the subsequent two years. Conversely, the company never posted a positive bottom line over the period under consideration. The company started making losses in 2018 due to significant operational losses in its sugar segment because of the enormous disparity between the sugarcane support price and the overall sugar price set by the government. The sugar division operated on a lower capacity and hence fixed overhead cost per unit magnified. The biofuel segment boasted good performance due to attractive margins and a twofold increase in exports, but it couldn’t sustain the bottom line. The detailed performance review of the period under consideration is given below.

In 2020, SML’s topline ticked up by 2.44 percent. While local sales ticked up, export sales drastically fell during the year owing to COVID-19-related protocols observed by many destination countries. During the year, the company started its crushing earlier and crushed 884,724 MT of sugarcane, up 82.51 percent year-on-year. However, biofuel production decreased by 35 percent to clock in at 9.82 million liters in 2020 due to high prices of molasses. This coupled with higher sugarcane prices resulted in price wars among the mills. Cost of sales hiked by 12.7 percent in 2020, resulting in a gross loss of Rs.671.68 million, up 2424 percent year-on-year. Distribution expenses slid by 51.58 percent in 2020 as freight & forwarding charges shrank on the back of reduced sales volume. Administrative expenses inched up by 2.95 percent in 2020 due to higher payroll expenses on account of inflationary pressure. SML squeezed its workforce from 1435 employees in 2019 to 1253 employees in 2020. Other expenses stayed intact as higher exchange loss and allowance for ECL were almost offset by lower waste water drainage charges incurred during the year. Conversely, other income mounted by 1127.82 percent in 2020. This was due to an adjustment on account of excise duty on the manufacturing of ethanol. SML recorded a 34.65 percent lower operating loss to the tune of Rs.293.22 million in 2020. Finance costs ticked up by 2.35 percent in 2020 due to a higher discount rate for the first half of the year. During the year, the company also recorded a share of loss worth Rs.538.64 million in equity accounted investee (Shakarganj Food Products Limited) versus a share of profit of Rs.5.28 million recorded in 2019. SML’s net loss stood at Rs.997.58 million, up 36.95 percent year-on-year. This translated into a loss per share of Rs.7.98 in 2020 versus a loss per share of Rs.5.83 registered in 2019.

In 2021, SML posted a staggering 42.94 percent year-on-year growth in the top line. Export sales which remained depressed in 2020 owing to COVID-19, rebounded in 2021. As the cane availability was low, the company had to pay the value higher than the notified support price to procure sugarcane and ensure uninterrupted operations. During the year, SML crushed 1006.075 MT of sugarcane, up 13.79 percent year-on-year. The distillery division couldn’t operate at its optimum capacity due to high raw material prices. The prices of the final product also increased, however, not with the same magnitude as its cost. This resulted in a gross loss of Rs.590.17 million in 2021. Higher sales volume and uninterrupted export sales drove up freight & forwarding charges. This resulted in a 79.15 percent escalation in distribution expenses in 2021. Administrative expenses also surged by 14.22 percent in 2021 due to higher payroll expenses. This was the result of inflationary pressure as well as an increase in the number of employees to 1300 in 2021. Other expenses mounted by 117.77 percent in 2021 due to loss incurred on the sale of property, plant & equipment, particularly its biogas power plant. Other income slid by 74.51 percent in 2021 due to the high-base effect as the company recorded adjustment on account of excise duty on manufacturing of biofuel. This overshadowed massive gains recorded on the sale of non-current assets, robust scrap sales, and amortization of government grants recorded by the company in 2021. SML recorded an operating loss of Rs.954.37 million in 2021, up 225.48 percent year-on-year. Finance costs dropped by 18.82 percent in 2021 on the back of monetary easing and also because of the settlement of a huge portion of outstanding borrowings. The company also recorded a share of gain worth Rs.65.13 million from equity accounted investee. SML registered a net loss of Rs.1387.91 million in 2021, up 39.13 percent year-on-year. This culminated in a loss per share of Rs.11.10 in 2021.

In 2022, SML posted year-on-year topline growth of 34.53 percent. The company’s crushing further increased to 1347.651 MT, up 33.95 percent year-on-year. While the high support price of sugarcane remained the source of concern for the company, improved prices resulted in a gross profit of Rs.370.71 million and a GP margin of 3 percent recorded in 2022. This was the only year over the period under consideration where the company posted gross profit. Besides, improved selling prices, another reason for posting gross profit was improved distillery operations due to the availability of its own molasses which increased production by 41 percent in 2022. Distribution expenses multiplied by 54.2 percent in 2022 due to higher freight & forwarding charges mainly on account of improved export sales. Administrative expenses ticked up by 3.3 percent in 2022 on account of inflationary pressure. SML significantly streamlined its workforce to 896 employees in 2022 which resulted in lower payroll expenses. 76.34 percent lesser other expenses recorded in 2022 was due to lower loss incurred on the sale of property, plant & equipment. Other income also slumped by 29.11 percent in 2022 predominantly due to lower gain recorded on the sale of non-current assets. Operating loss dwindled by 93 percent to clock in at Rs.66.04 million in 2022. Finance costs increased by 22.28 percent in 2022 due to monetary tightening and fewer outstanding borrowings. Share of profit from equity accounted investee slid by 1.43 percent in 2022. SML recorded the lowest net loss of Rs.225.30 million in 2022, down 83.77 percent year-on-year. This translated into a loss per share of Rs.1.8 in 2022.

In 2023, SML’s topline contracted by 22.42 percent year-on-year due to lesser sales volume. During the year, the company’s crushing slid by 24.37 percent to clock in at 1019.181 MT. This was due to high competition among the millers for the procurement of cane and the exorbitantly high support price set by the government. Molasses procurement also suffered due to the smaller crushing season. The textile business remained lackluster due to lesser demand for yarn. Cost of sales dipped by 17.32 percent in 2023, resulting in a gross loss of Rs.322.72 million recorded in 2023. Distribution expenses tumbled by 42.59 percent in 2023 due to thinner sales volume. Administrative expenses ticked up by 5.91 percent in 2023 due to higher payroll expenses despite workforce retrenchment to 868 employees. 438.94 percent spike in other expenses in 2023 was the consequence of net exchange loss incurred during the year. However, other expenses were offset by 139.44 percent higher other income recognized during the year on the back of the sale of biofertilizers made during the year. SML recorded an operating loss of Rs.587.77 million in 2023, up 790 percent year-on-year. Finance cost posted a marginal 7.87 percent year-on-year uptick in 2023 despite monetary tightening. This was because the company had fewer outstanding borrowings during the year. Share of profit from equity accounted investee increased by 36 percent in 2023. SML registered a net loss of Rs.546.22 million in 2024, up 142.44 percent year-on-year. This translated into a loss per share of Rs.4.37 in 2023.

In 2024, SML’s net sales further shrank by 7.63 percent. The sugarcane support price set by the government at the start of the season was Rs.400 per 40 kg; however, the unofficial price went above Rs.500 per 40 kg. Due to the non-availability of sugarcane at reasonable prices, the company closed its crushing operations in 91 days and crushed only 778.454 MT of cane, down 23.62 percent year-on-year. The biofuel and textile business also underperformed well during the year due to weak demand in the international market. Nonetheless, the cost of sales spiked by 9.82 percent in 2024, resulting in the highest-ever gross loss of Rs.2022.99 million, up 526.87 percent year-on-year. Thinner sales volume drove down distribution expenses by 35.69 percent in 2024. Conversely, administrative expenses succumbed to inflationary pressure and surged by 9.12 percent in 2024 despite workforce rationalization to 761 employees. Provision booked against doubtful advances and doubtful export rebate receivable resulted in 40.27 percent higher other expenses in 2024. Other income also dropped by 66.25 percent in 2024 due to a massive decline in the sale of biofertilizers. Operating loss multiplied by 335.59 percent to clock in at Rs.2560.29 million in 2024. Finance cost ticked up by only 3.8 percent in 2024 despite monetary tightening as the company settled a huge portion of its outstanding borrowings during the year. During the year, SML recorded a share loss of Rs.137.33 million in equity accounted investee. The company recorded a net loss of Rs.3057.44 million in 2024, up 459.75 percent year-on-year. Loss per share was recorded at Rs.24.46 in 2024.

Recent Performance (For the three-month period ended December 31, 2024)

During the period under consideration, SML’s topline dwindled by 9.15 percent. Due to an extended period of net losses, the company’s accumulated losses mounted to Rs.5690.326 million as of December 31, 2024. The company faced a liquidity crunch and was able to crush 229.734 MT of sugarcane during the period, down 8.28 percent year-on-year. This was despite the fact that the average sugarcane cost dropped to Rs.386 per 40 kg in 1QFY25 from Rs.403 per 40 kg in 1QFY24. Biofuel division produced 280.462 liters, up 166.23 percent year-on-year; however, revenue from biofuel division declined as export was yet to be started. The textile division was non-operational during the period. Cost of sales declined by 12.42 percent in 1QFY25, resulting in a 30.57 percent slump in gross loss during the period. Distribution expenses inched down by 4.82 percent in 1QFY25 due to lower sales volume. Inflationary pressure resulted in 15 percent higher administrative expenses in 1QFY25. Operating loss was recorded at Rs.381.12 million in 1QFY25, down 24.72 percent year-on-year. Finance costs tumbled by 16.58 percent in 1QFY25 due to the onset of monetary easing and lesser outstanding borrowings. SML recorded a share of loss of Rs.118.75 million in equity accounted investee (Shakarganj Food Products Limited). This was against the share of profit of Rs.20.54 million in 1QFY24. Net loss nosedived by 7 percent to clock in at Rs.514.68 million in 1QFY25. This translated into a loss per share of Rs.4.12 in 1QFY25 versus a loss per share of Rs.4.43 recorded in 1QFY24.

Future Outlook

The provincial governments are mulling over to deregulate the sugar industry. As a part of it, the government will not set the minimum support price of sugarcane and let it be determined by market forces. This will bode well for the sugar industry and allow them to address rising production costs. Besides, monetary easing as well as improvement in other macroeconomic fundamentals in the local market will also be beneficial for the industry. Reportedly, the government is also considering the imposition of FED on the sugar sector. If implemented, it will increase the prices of sugar.