Faran Sugar Mills Limited

Faran Sugar Mills Limited (PSX: FRSM) was set up as a public limited company in 1981 under the Companies Act, 1913 (repealed with the enactment of the Companies Ordinance, 1984 and later Companies Act, 2017). The company produces and sells white crystalline sugar.

Shareholding pattern

As at September 30, 2021; over 79 percent shares are categorized under “individuals”, followed by over 9 percent in mutual funds. A further breakdown reveals that within the category of directors, CEO, their spouses and minor children, about 16 percent shares are owned by Mr. Ahmed Ali Bawany, the CEO of the company, and another over 10 percent shares are held by Ms. Shahida Amin. The remaining shares are with the rest of the shareholder categories.

Historical operational performance

Over the years, the company has witnessed a fluctuating topline, with profit margins declining after MY18.

In MY17, revenue decreased by 32 percent, reducing from Rs 6.5 billion in MY16 to Rs 4.4 billion in MY17. Local sales fell drastically by 45 percent. This was attributed to a lower sales volume as well as a lower selling price. Additionally, cost of production hiked to more than the revenue, causing the company to post a gross loss of Rs 98 million. Although other income increased substantially due to reversal of deferred liabilities and excess provisions of prior years, it was not sufficient to make for the loss incurred. The latter was also worsened by the escalation in finance expense that rose to 3 percent of revenue due to the rising need for working capital. Thus, the company incurred a loss for the first time, of Rs 184 million.

Topline in MY18 grew by nearly 42 percent, to reach Rs 6.3 billion. Local sales shrunk by 51 percent, while export sales grew to Rs 3.4 billion from Rs 908 million in the previous year. The increase in revenue is attributed to an improvement in sales volumes that was higher by 50 percent year on year, whereas selling price was lower. With cost of production reducing to over 91 percent of revenue, the company earned a gross margin of 8.7 percent. Despite the rise in selling expenses the significant support received from other income and share of profit in associates combined, the company also posted a higher net margin of 7 percent for the year.

Revenue contracted again in MY19 as it fell by over 26 percent. Export sales nearly disappeared in comparison as they reduced to Rs 492 million from Rs 3.4 billion seen in the previous year. On the other hand, local sales picked up as it more than doubled year on year. But this was accompanied by an increase in cost of production that consumed nearly 94 percent of revenue, reducing gross margin to 6 percent. However, operating and net margin was supported by the decline in selling expenses and a further rise other income. The latter came from reversal of excess cane cost provision for the year 2017-2018. So while net margin was higher at over 8 percent, in terms of value net profit was lower year on year at Rs 380 million, compared to last year’s Rs 442 million.

In MY20, revenue registered an increase by 24.5 percent to reach Rs 5.75 billion in value terms. Gross local sales increased by 27.7 percent, while export sales went up by 26 percent. The higher revenue was attributed to an increase in selling price. However, this did not translate into higher profitability due to the high rate of sugar cane that increased the cost of production to over 95 percent of revenue. As a result, gross margin reduced to 4.6 percent. With other income and share of profit in associates also reverting to previous levels, that is, before MY14 and MY15, the company incurred a loss of Rs171 million for the year.

Revenue contracted for the third time in the last five years, by 15.5 percent in MY21. This was due to lower sales volumes, despite a higher selling price. While export sales disappeared entirely, net local sales registered a decline of 5.2 percent. Moreover, cost of production continued to make a larger share in revenue, causing gross margin to be posted at less than 1 percent. With little to no support from other income and share of profit in associate, the company eventually posted a net loss of Rs 371 million.

Quarterly results and future outlook

Revenue in the first quarter of MY22 more than doubled year on year. This was attributed to better volumes and selling price. As a result, gross margin improved significantly, due to sale of carry-over stock at healthy margins. This also trickled to the bottomline that was higher at Rs 140 million versus Rs 51 million seen in the same period last year.

The production of sugarcane is affected by impact of government support, farmers’ planting decisions and crop yields. The company estimates production for current MY22 to be 6.8 million metric tons compared to domestic consumption of 6.2 million metric tons.