JDW: profitability has seen better days

Annual accounts of the sugar industry’s giant (PSX: JDW) were announced at the bourse yesterday. And a cursory look at the P&L shows that the powerful impact of 20 percent increase in average retail price of sweetener during the period.

Topline growth for the period came in at 32 percent – highest for the decade. While aggregate revenue from other sources such as sale of electricity, molasses, agri-inputs, and produce historically contributes as much as one-fifth of total, its obvious that the unprecedented leap in topline has come on the back of domestic sugar sales.

Recall that last year, healthy contribution by exports in tandem with a substantive subsidy were unable to make up depressed prices in domestic market. And although the company did enjoy subsidy on exports for six months of MY19, its effect would be marginal due to lower per kilo quantum.

Even so, scroll down historical financials and it becomes abundant that increase in domestic retail prices can only go so far in boosting profitability. While margins show an improvement over the previous year, both EBIT and PBT margins are still second lowest for the decade.

Why? Because a giant with a share of more one-fifths in total installed capacity of the industry suffers when output falls. Total crushing for the year was lower by 33 percent, and while some respite was received due to recovery rate for 11.3 percent – highest in six years – cost of production leaped forward in tandem with revenue due to low capacity utilization reflecting in poor economies of scale.

Margins received further battering at the hands of increased interest expense, that grew on the back of what appears to be an increase in average debt for the period – never mind the increase in debt servicing costs at the hands of higher discount rate. And were it not for a reversal of tax liability, bottom line for the year may very well have been in red, just like last year.

And if restrained increment in profitability margins appears disappointing that’s only part of the story. Market intelligence indicates that the group balance sheet may also have received a battering due to years of expansion (buying spree) that has substantively increased group’s leverage.

Nevertheless, the company still boasts a healthy interest cover. And with interest rates projected to witness easing in the ongoing year, the worst may be (almost) over for JDW.