Capital structure of listed sugar mills

The policy rate is at an eight-year high of 13.25 percent, and prominent economists are declaring it ‘default’ season on primetime television. For investors, it then becomes relevant to measure the extent of leverage in major manufacturing sectors, and for the sugar milling industry; the picture is not very rosy.

Out of 80+ sugar milling firms in the country, only 31 are listed. Of these, at least four – namely, Pangrio, Mirza, Saleem, and Ansari – have not published financials at least since 2015. Latest financials for marketing year ended September 30, 2018 are available for remainder 26 mills, whereas Tandlianwala is yet to share latest year financials, despite being the second-largest player on the domestic seen.

Yet the investors may not be happy even with those who have timely shared their audited books. Why? Because the sector’s financial health can at best described as “ailing, with no signs of recovery”.

Consider that ‘surplus on revaluation of fixed assets’ - a sanctioned accounting gimmick taken to restore health to equity and balance-off accumulated loss – is not an exception but a norm among the listed players of the sector.

Of the 27 firms reviewed, at least 19 had taken a revaluation of fixed assets in at least past three years, whose affect continued to positively influence total equity figure in the most recent financial period. Though more worryingly, nine out of these 19 would have recorded negative net equity had it not been for the revaluation exercise, meaning that the accumulated losses in subsequent periods had wiped-out paid-up capital, reserves and retained earnings (if any).

Two firms recorded negative equity even despite taking surplus, raising questions on their ‘going concern’ assumption.

The mantle for healthiest balance sheet - with financial leverage of just 1.30 times – went to Habib Sugar Mills. Considering the group-sponsor’s history for lean financial management, that should come as no surprise. Put together, eight firms who have never taken a reval. Had an average ratio of 3.58 times, with highest for Noon Sugar at close to 6 times. This is still decent when compared to 17.4 times of Khairpur Sugar, for whom it appears that the surplus exercise was clearly of no help.

Readers will be hard pressed to eke out any trend among the highly levered balance sheets of the industry. While the 11 Punjab-based mills had an average leverage of 3.6 times, average for Sindh-based 14 mills came in at 4.97 times. Although the difference may appear substantive, it is inconsequential considering that players who have taken significant levels of reval, to rebalance equity position are equitably distributed and are geographically-blind.

Even political influence appears to be no indicator of financial health, considering mills owned by politicos such as Tandlianwala have a relatively healthy position at under 4 times leverage, whereas mills under private sector sponsors such as Khairpur, Dewan and Abdullah Shah Ghazi are all reeling close to bankruptcy.

What can be safely concluded is that industry is feeling the heat of high debt servicing cost.

But if there is one lesson to be drawn from Habibs and their modest operations, it is that when sponsors are earnest in maintaining efficiency, it is not impossible irrespective of industry dynamics or macro variables.

Notes: Financial leverage calculation is based on Equity Multiplier i.e., ratio of Average Total Assets to Total Equity. Equity is inclusive of surplus on revaluation of fixed assets.

Firms where equity inclusive of surplus on reval are marked with (*). Firms where equity net of surplus on reval. would have been negative, are marked (*?), and include: Abdullah Shah Ghazi; Baba Farid; Dewan; Haseeb Waqas; Husein; Khairpur; Premier; and, Sakrand Sugar Mills. Abdullah Shah Ghazi and Haseeb Waqas excluded from graph illustration on account of ratio being negative (gross equity incl. of surplus exceeds total assets). Figures for all listed firms based on September 30th, 2017 and 2018 period-end balance sheets, excluding Tandlianwala where 2016-17 financials used as latest unavailable.

For JDW, and Tandlianwala, firms marked as Punjab-based as majority capacity installed in the province. Color coding – Sindh mills: Orange; Punjab: Green; KP – Red.