Shakarganj Limited

The flagship company of the Shakarganj group, Shakarganj Limited (PSX: SML) is one of the country's largest sugar manufacturer and bio-fuel producer. Incorporated in 1967, the company also operates in bio-power, building materials, textile, and farming. Its market capitalisation is north of Rs 6.5 billion. The firm has received the FPCCI's Best Export Performance in eight of the past ten years. Moreover, Shakarganj Limited holds a controlling interest in Shakarganj Food Products Limited, which is a leading producer of dairy and fruit products.
Stock performance & Pattern of Shareholding SML stock has largely been flat and below the KSE100 for the first three quarters of 2016. However, the stock has skyrocketed since January, when the company announced its upbeat annual results.
The pattern of shareholding reveals that the majority of SML shares are with various Crescent Group companies - the most being with Crescent Steel. Around one-third of the shares are with the public, while the company's own executives and owners cumulatively own around 11 percent.
Prior Performance Shakarganj Limited has been in trouble for quite some time now, with a consistently falling top line; the company's five-year sales CAGR stands at -21.6 percent. Meanwhile, the bottom-line has been in the red for the past three years. As of the most recent marketing year ended (MY16), the gross margin had shrunk to -6.8 percent - a new low for the company.
As the graph illustrates, Shakarganj's sugar production has reduced dramatically over the years. As per the Director's Reports of these years, the reasons for the lower production included rise in sugarcane prices, floods in Jhang (2013), non-availability of sugarcane, shortened crushing seasons (2015 & 2016), and overall high cost of production vis-à-vis a low selling price of sugar. Moreover, Shakarganj's sucrose recovery rate has also been slightly lower than the national average, though the recently concluded year has shown an increase.
As of FY16, sugar makes up over 72 percent of Shakarganj's sales, followed by textile (16%) and bio-fuel (12%). The bio-power and building materials segments have been closed since last year due to inconsistent distillery operations and unavailability of surplus bagasse due to the low crushing. The farm segment's contribution to the revenue stream is less than one percent.
As the graph indicates, all of Shakarganj's businesses have seen lower sales, especially the distillery operations. This is quite unfortunate because in terms of profit, it is the bio-fuel segment that seems to be making any mark on the bottom-line. The company significantly reduced production due to low bio-fuel selling prices and volatility in local and international markets, and in fact had to close down this segment as well in the second half of MY16.
As far as exports are concerned, over 90 percent are from the bio-fuel segment. However, given the depressed international selling prices since the past couple of years, the segment has been in deep trouble. The majority of Shakarganj's sugar as well as yarn are sold locally.
Recent Performance A welcome break from the past several years has come in MY17; for the first quarter ended, Shakarganj's top line has more than quadrupled over last year. Gross profit and margins were in positive territory, as the core business of sugar seems to have turned around. However, the bottom-line was down by 13 percent year-on-year, but this was due to lower other income and profit from associates.
The quarter under review saw action almost entirely in the sugar segment. As per the Director's Report, Shakarganj's sugar production was up by 237 percent year-on-year. Better sugar prices during the period gave the sugar division an operational profit of Rs 108 million, as against a loss of Rs 100 million in 1QMY16.
The textile division saw 20 percent higher yarn production. However, this segment was still unable to turn a profit. The company's quarterly report cites irregular supply of electricity and long shutdowns as hampering the division's productivity.
The bio-power and building materials segments remained closed during the quarter. However, the distillery operations were starting back up and managed to produce 1.75 million litres of bio-fuel as against 2.05 million litres the year ago.
Outlook Sugar prices have remained strong locally and have rebounded internationally. No increase in the sugarcane price was announced and this year's crop is strong. All these factors bode well for sugar manufacturers in Pakistan.
Going forward, Shakarganj's bio-fuel plants have restarted production and the company is expected to reclaim its place as the leading bio-fuel exporter of the country. As per the quarterly Director's Report, the management is working to acquire molasses at reasonable costs for this segment. Moreover, the company has also entered into agreement for sale of carbon dioxide (CO2) - a by-product of bio-fuel manufacturing - which is expected to reflect in the coming quarterly results.

==================================================================

Shakarganj Limited

==================================================================

Rs (Million)                      1QMY17     1QMY16            YoY

==================================================================

Net Sales                          2,580        598           331%

Cost of Sales                      2,441        652           274%

Gross Profit                         139        -53          -362%

GP Margin                             5%        -9%    up 1430 bps

Administrative Expenses               59         54             9%

Distribution & Selling Expenses        6         11           -45%

Other Operating Expenses              15         11            36%

Other Income                          37        198           -81%

Finance Cost                          35         41           -15%

Share of Profit from Associates       72         86           -16%

Taxation                              30         -2         -1600%

Profit/(Loss) After Tax              102        117           -13%

NP Margin                             4%        20%  down 1560 bps

Diluted Profit/(Loss) per share     0.93       1.55           -40%

==================================================================

Source: company notice to PSX

===========================================================

Pattern of Shareholding Shareholders Category

===========================================================

                                                 Percentage

                                                 of holding

===========================================================

Directors, CEO, their Spouses & Minor Children        5.27%

Executives                                            5.64%

Associated Companies                                 40.44%

Crescent Steel & Allied Products Limited             21.93%

The Crescent Textile Mills Ltd                        7.81%

CS Capital (Pvt) Limited                              6.08%

Crescent Cotton Mills Ltd                             3.21%

NIT and ICP                                           8.02%

Mutual Funds                                          3.65%

Banks, NBFCs, DFIs and Pension Funds                  0.99%

Other Companies,Corporate Bodies, Trust etc.          4.30%

General Public                                       31.70%

===========================================================