Press Release

VIS Reaffirms Entity Ratings of Chashma Sugar Mills Limited

Karachi, November 06, 2023: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Chashma Sugar Mills Limited (CSML) at ‘A-/A-2’ (Single A Minus/A-Two). The medium to long-term rating of ‘A-’ signifies good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are sound. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on Oct 28, 2022.

CSML is a subsidiary of The Premier Sugar Mills and Distillery Company Limited. The group companies associated with it have diversified interests spanning sugar, ethanol, high-grade polypropylene, real estate and distribution of consumer goods and bulk storage of agriculture produce. Moreover, Ultimate Whole Foods (Pvt.) Limited (UWFL), a subsidiary company of CSML with equity stake of 72%, has recently commenced commercial operations. UWFL is primarily involved in milling wheat, gram, other grains, allied products and by-products from flours. Total sugarcane production in 2022-23 season was reported lower at 82.4m MT vis-à-vis 89.0m MT in the preceding year due to floods. Sugar prices were consistently under pressure throughout the outgoing crushing season due to excessive sugar stocks available in the country while the Government allowed 250,000 MT of exports in the outgoing year. However, there was a significant surge in sugar prices after the season's conclusion, primarily in line with inflationary trends. Retail sugar prices, while remaining relatively elevated, have recently exhibited a downward trend due to the Government initiatives aimed at reducing smuggling. Meanwhile, given higher indicative prices of sugarcane for the upcoming crushing season and lower available sugar stocks in the country, it is expected that sugar prices will increase, going forward. Nonetheless, the ratings do incorporate inherent cyclicality in crop levels and price vulnerability in sugar sector leading to competitive challenges for the company. The ratings also takes into account diversification into ethanol business, supporting the overall risk profile of the company.

MY23 concluded with a significant growth in topline driven by ~29% increase in average selling prices and 20% higher volumetric sales of sugar, which accounted for more than two-third of the sales mix. Moreover, ethanol sales, contributing around 30% to the topline, augmented by nearly 70%, largely on the back of higher ethanol prices. Positive demand dynamics of ethanol underpinned by increasing trend towards its blending with gasoline fuels in the international market, and competitiveness of local players due to massive currency devaluation, bodes well for the industry players. As a result, the outgoing year saw a significant enhancement in gross margins, leading to a positive effect on the bottom line and resulting in higher net margins, even in the face of increased financial expenses. The debt service coverage has remained adequate on a timeline basis. The leverage indicators have also exhibited improvement primarily on account of higher equity base and reduction in short-term financing as of Sep 30, 2023. Meanwhile, over the past two years, the company secured substantial long-term loans to support its long-term investments, as well as initiatives related to balancing, modernization, and replacement (BMR). This could potentially put strain on the bottom line due to the added financial cost obligations. Nevertheless, the management anticipates receiving additional revenue from power sales and dividends from its subsidiary company, UWFL, which is projected to support the overall profitability of the company. Meanwhile, the ratings will remained dependent on realization of projected growth in revenues and profitability, along with improvement in liquidity and capitalization profile, going forward.

For further information on this rating announcement, please contact Ms. Tayyaba Ijaz, CFA at 042-35723411-12 (Ext. 8005) and/or the undersigned at 021-35311861-64 (Ext. 207) or email at info@vis.com.pk.

Sara Ahmed
Director

Applicable Rating Criteria: Industrial Corporates (May 2023)
https://docs.vis.com.pk/docs/CorporateMethodology.pdf

VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2023 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .