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‘Tis the season of performance appraisals! As calendar year reaches its conclusion, the sugar industry has begun announcements of its annual financials on the bourse. Industry watchers may recall that the industry marks its financial year close on September 30th (Oct – Sep). So far, 11 out of 27 listed sugar manufacturers have announced their financials on the bourse, with annual results of three of the largest players – JDWS, TSML, and PMRS – still awaited.

It may be worth noting that the results announced so far may not be fully representative of the industry performance in the outgoing financial year MY21 (Oct 2020- Sep 21). According to an analysis by BR Research, as much as 60 percent of the average output of the sugar industry rests with non-listed players. Nevertheless, the results announced so far still represent a cross-section of the industry, as it includes sugar milling units located across the geographic span of the industry, as well as manufacturing units of small- (e.g. Baba Farid); mid-sized (e.g. Al-Noor); along with one of the five largest sugar producing groups in the country (e.g. Thal Industries).

So, what insight does this mix bag of players have to offer? Intriguingly, the cumulative net turnover of the 11 players increased by just less than 11 percent during the marketing year 2020-21, which is surprising considering the nearly 21 percent rise in average retail price of sugar over the previous year (12-month average). Even more surprisingly, 6 out of these 11 players recorded a decline in annual turnover, with two companies – Thal Industries and Baba Farid belonging the same sponsor group – responsible for 85 percent increase in industry (sample’s) net turnover.

What is not surprising, however, is the less than satisfactory performance on the profitability front. Six out of 11 companies recorded negative or no change in gross margin, which fits well into industry’s narrative that the cost of production raised massively during 2020-21 crushing season due to unexpected rise in commercial rate of raw material - sugarcane. Despite official claims of bumper crop and 22 percent rise in cane production, industry claims that the average buying rate rose by as much as 15 – 20 percent across various regions. Since industry claims that sugarcane accounts for as much as 80 percent of cost of refined sugar production, the unfavourable change in raw material price seems to have clearly translated in final prices, reflected itself in secondary market prices of sugar.

But the marketing year certainly remained one of the healthiest for the industry in recent memory, based on purely financial metrics. Not only the sugar finally out of the woods – no longer requiring the clutches of government’s largesse to muddle through – operating margins show that none of the players bleeding in red, a welcome change after a long while. Not only is the cost structure favourable, debt servicing did not seem to spiral out of control, with all 11 firms recording interest cover 0.5 xs.

Will the good times continue into 2022? It may be too early to say as two major risks persist. First, sugar mills in Punjab have already begun making their annoyance public with the commercial rate of sugarcane, which they claim is now selling in excess of Rs 250 per maund. This is inexplicable considering official claims of largest crop in country’s history, which if correct would mean oversupply in local market and secondary market prices of sugar falling off the cliff if history is any guide (circa 2017-18).

More importantly, the policy rate has marked a sharp reversal, which does not bode well for the sugar marketing cycle, as mills rely heavily on short-term borrowing from banks at commercial rate to procure cane for crushing and build inventory which is sold gradually over the remainder year. Market timing, then, will remain key in determining which players come on top in the ongoing financial year. The games have already begun!

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