Baba Farid Sugar Mills Limited (PSX: BAFS) was established in 1978 under the Companies Act 1913 (now Companies Act 2017). The company manufactures and sells sugar as well as the by-products, molasses and V.Filter cake. Its manufacturing facility is located in District Okara, Punjab.
As at September 30, 2021, the directors, CEO, their spouses and minor children held 97 percent shares of the company. Within this category the major shareholders are the Chairman of the company Mrs. Qaiser Shamim Khan, Mr. Muhammad Shamim Khan, an executive director, Mr. Adnan Ahmed Khan the CEO of the company, and Mr. Nauman Ahmed Khan, a non-executive director. The local general public holds close to 3 percent shares while the remaining less than 1 percent shares are with the rest of the shareholder categories.
Historical operational performance
Baba Farid Sugar Mills has mostly seen a fluctuating topline, whereas profit margins in the last six years have been relatively stable except for a significant dip in MY19.
Revenue in MY18 contracted by 28.5 percent, the highest seen thus far, to reach Rs 1.4 billion compared to Rs 1.9 billion in MY17. This was attributed to technical problems in power house, turbine, transformer and boiler. As a result, sugar production was also lower at 18,261.9 metric tons compared to 35,496.5 metric tons in MY17. Sugar recovery was also lower at 8.773 percent against 9.109 percent in MY17. Moreover, generally sugar prices were depressed due to a good crop both locally and internationally that resulted in excess production and carryover of stock, thus pushing prices downwards. With costs intact, the company incurred a gross loss of Rs 164 million. This further worsened to a net loss of Rs 374 million due to a rise in finance expense that was a result of an increase in interest rates.
In MY19, there was a change in management control. The new management took charge on June 13, 2019. During the period the company remained under the process of change in management, therefore the operations of the company remained closed during the transition period. Revenue was recorded at a substantially lower level of nearly Rs 122 million. With further expenses incurred, the company eventually posted a net loss of Rs 683 million- the highest seen.
The company’s topline bounced back as it was recorded at Rs 1.8 billion during MY20. The company produced 25,159 metric tons of sugar at a recovery rate of 8.7 percent. In MY19, its sugar production was notably lower at 1935.6 metric tons. The year-on-year improvement is attributed to a change in management and improved production efficiency. The company was able to cover its cost of production as it posted a gross profit of 1.6 percent. However, with operating expenses incurred and further increase in finance expense, Baba Farid Sugar Mills saw a third consecutive year of losses, at Rs 286 million, but it was significantly lower than that seen in MY19.
Topline in MY21 more than doubled year on year to reach nearly Rs 4 billion which is the highest the company has seen since MY12. Sugar production was also significantly higher at 41,501.5 metric tons at a marginally higher recovery rate of 9.072 percent. In addition, sugar prices were also improved due to a demand-supply gap. On the other hand, cost of production fell to 93.5 percent of revenue that allowed the company to post a gross margin of 6.5 percent. With relatively substantial support coming from other income and a reduction in finance expense to 3 percent of revenue- the lowest seen, the company earned a positive net margin of 3.16 percent, after posting three consecutive years of loss.
Quarterly results and future outlook
In the first quarter of MY22, revenue was higher by over 8 percent year on year. Sugar production was also higher at 15,900 metric tons at a recovery rate of 8.36 percent. Sugar production in the corresponding period last year stood at 14,215 metric tons, lower by almost 12 percent. Despite the higher topline, profitability was lower year on year due to an increase in cost of production. The latter was attributed to a rise in raw material prices. Although the support price for the crushing season 2021-22 is Rs 225 per 40kg in Punjab and KPK, sugar cane is actually being procured at a much higher rate. Moreover, due to an early start to the crushing season, there is severe competition for the procurement of sugarcane that has triggered a price war. Thus, the company ended the period with a net loss of Rs 34 million versus a net profit of Rs 8 million in 1QMY21.
The sugar cane crop for the current season is expected to be 10-15 percent higher. But with sugar cane continuing to be procured at a price above the notified price, it will push the cost of production higher, and can also have the same impact on sugar prices.