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It is that time of the year again. Annual financials of listed sugar mills* have been announced on the bourse for marketing year 2018-19 (October to September). Confusion surrounding the recent price hike of white sugar in wholesale markets has left people wondering if sugar millers have managed to make hay; but the bets seem pre-mature.

First, for better part of the year, retail price of sugar had averaged at just Rs 57.3 per kilo, well-under the Rs 60 per kg barrier at which sugar mills had struggled to break even in previous years. Fortunately for industry’s profitability, the upswing came beginning April-19, and lasted through peak consumption season of Ramzan and summers.

Did the good luck translate into improved profitability? While a broad-based sectoral analysis would be more reflective, close to fifty percent of installed capacity belongs to non-listed units. But more importantly, even medium to large-sized operations (with annual turnover above Rs 7.5 billion) belong to mils with highly diversified revenue streams, deriving more than half of revenue from vertically integrated distillery, bagasse power, and/or particle board operations.The analysis presented here thus focuses on a very narrow sample: listed mills with at least 85 percent of sales concentrated in the core sugar milling business. Historically, the 12 selected units have maintained an average 15 percent share in industry volume but are geographically representative of milling operations spread across all three cane-growing provinces.

The operational snapshot is representative of industry-wide trend: non-diversified mills saw production decline by over 23 percent, compared to just 6 percent for all 82 units. On the supply-side, this appears to be a result of shortfall in cane crop which was lower by 20 percent.But on the demand-side, low retail prices of sugar through crushing period (December to March) hit the non-diversified smaller units harder, as they have lower use of by-products such as bagasse that feeds into high margin power generation operations.

Nevertheless, the eventual recovery in retail price seems to have had a wealth distribution effect across the industry. For the first time in several years, all pure-sugar milling operations managed to post positive EBIT, with interest coverage ratio averaging at 1.7 times for the 12 selected units.Does that mean these commodity-price driven units are relishing at the time of LSM contraction? That would be misleading. Once the crushing season begins, mills become heavily dependent on bank credit, as working capital finance allows them to pledge sugar produced so they hold-on to inventory – hoping to time the market/wait for price improvement.

Except, at a time when discount rate has averaged over 12 percent for almost a year, that is easier said than done. Bloating interest cost means that mills had to walk a very thin line, and in several cases saw the earnings from core operations wiped out from interest cost alone. No surprises then that during the same period, at least 6 listed units remained non-operational, with two changing ownership to cut losses.That does not mean all is gloomy for the sector. Mills located in Punjab benefited from subsidy on sugar export for first three quarters of the marketing year, while some mills from Sindh also took advantage of improving price in export market. Ironically, now that international price is at an 18-month peak, mills can no longer benefit, given a ban on export due to shortfall in domestic market. Such are the unintended consequences of restricting trade.

Meanwhile, the non-diversified units must make do with the small window opened due to price upswing in domestic market. That means things are looking up for these firms in MY20, but by how much depends on the interest cost. And if yesterday’s monetary policy decision is any guide, that’s showing no sign of abatement.

*financials of Tandlianwala, Abdullah Shah Ghazi, and Adam Sugar are still awaited; illustrations are based on annual reports of 12 mills for 2018-19.