TSML: short-lived recovery?

Record fifty-six percent topline jump with over doubled pre-tax profits – that’s what a roaring profitability season looked like for second largest sugar player in the industry during last marketing year. Yet, Tandlianwala’s (PSX: TSML) recovery during MY19 appears to have been short-lived, as company’s performance during 1QMY20 fell back to Dec-2017 levels.

Contraction in topline during first quarter comes as a surprise since sugar price in domestic market during the period were at 9-year high. As per PBS, retail price during Oct to Dec 2019 averaged at Rs72.5 per kg, which is also 32 percent higher than same period last year.

Does lower export then account for falling topline? Recall that Punjab based sugar mills enjoyed generous export quota during 2019, which on surface may indicate that higher domestic demand since has impacted revenue from exports. Except, disclosures from quarterly financials from last year shows that the company had made nil exports during 1HMY19.

What’s going on then? It looks like that the company began crushing early on, but shortfall of crop resulted in exorbitant increase in raw material prices. While no official confirmation is available to this effect, market intelligence indicates that mills in southern Punjab – home to much of TSML’s installed capacity – went on a strike for a good 15 – 20 day period, owing to cane selling at more than 30 percent premium over government notified rate.

A cursory review of management notes does not reveal whether TSML was part of the strike, or whether the strike was over by first quarter end. What it does hint, however, that lower revenue is a result of the company holding on to its carry over inventory from previous season.

That does not seem entirely far-fetched. Considering that production days during first quarter could be no higher than 15, a twenty percent increase in trade debt headline number (itemized breakup unavailable) is indicative of stock build up.

Moreover, industrywide total output during the full crushing season is expected to remain flat lined – or record a marginal decline over previous year. That means the strategy may bear fruit as TSML will be able to average out per unit production cost at lower side, while taking benefit of decade high peak in retail prices.

With that context, an 82 percent year on year decline in Q1 bottom line no longer looks bleak. But a lot depends on the procurement price during the second quarter. On one hand, maintaining crushing at last year’s level may demand competing for cane in open market at high rates; on the other, cutting back on production may also push growers in mill home region away from cane crop for coming seasons.