JDW 9MFY18

For the shareholders of JDW, a company that had posted record high sales during last marketing year, the 9-month period ending June 208 has been nothing short of a bloodbath. But did the sector not have it coming? After all, there is only so much milking any given subsidy.

For the uninitiated, JDW Sugar is the biggest player in the sector, with the contenders trailing far behind. Last year, the company had managed record high sales on the back of bumper sugarcane crop, highest ever crushing and production.

No doubt, JDW is an efficient player, with sucrose recovery rate 80 bps higher than industry over the last years. A quick review of its financial accounts over the last several periods reveals that the company operates on very amicable with growers, releasing support price payments on timely basis.

But every company must maintain its profitability, and as the largest player on the block, JDW has a history of lobbying heavily for lowering of sugarcane support price. Pakistan’s average sucrose demand average around 5 million metric tons per annum, whereas the millers have been yielding nearly 7 mn metric tons over the last 2 years.

Sugar prices have also remained depressed in the global commodity market in recent times, so the writing on the wall is abundantly clear: there is a sugar glut and millers need to lower production. When millers demand lowering of support price, hue and cry is made by the farmer groups accusing millers and government of collusive behaviour.

Cane growers are an influential lobby so instead lowering support price, government swings the carrot of export subsidy at millers. Note this year government has announced subsidy on export of up to 1.5 million metric tons of sugar, and being the largest player, JDW will be the biggest beneficiary. Except that this has increased in selling cost, which has reflected in 363 percent YoY increase.

Profitability has sloped downwards too, which is not very surprising since the trend had begin to give telltale signs during full year results for MY17, when net margin had declined by 1 percentage point.

However, the decline during period under review is mind boggling, with gross margin shrinking by 12pp! Net margin has also declined by 4 percentage points. There is lesson for those who pay heed in JDW’s financials: JDW has invested heavily in efficiencies of production processes, and this has yielded commendable results in the past. But when industry fundamentals are shaky, no amount of efficiencies in overhead can save the day!