Press Release

VIS Reaffirms Entity Ratings of Deharki Sugar Mills (Pvt.) Limited

Karachi, May 17, 2023: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Deharki Sugar Mills (Pvt.) Limited (DSML) at ‘A/A-2’ (Single A /A-Two). The medium to long-term rating of ‘A’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payment coupled with sound company fundamentals and liquidity factors. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on April 15, 2022.

The ratings assigned to DSML take into account its association with JDW Sugar Mills Limited (JDWS), the largest sugar manufacturer in the country. Being a wholly owned subsidiary of JDWS, the company draws various benefits from its parent including operational integration. Sugar output in 2022-23 is expected to reduce owing to adverse impact on sugarcane crop due to floods. However, due to surplus sugar stocks available in the country, the Government has so far allowed 250,000 MT of sugar exports in the ongoing year. Sugar prices have depicted a rising trend since the last month. Meanwhile, 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 take note of developments with regards to penalties imposed by Competition Commission of Pakistan (CCP) on certain sugar mills. The operation of the said order has been suspended and CCP has been restrained from recovering the penalty imposed in terms of an order of the LHC dated October 2021 followed an interim stay order for the same by the Commission Appellate Tribunal. VIS will continue to monitor further development in this matter.

During MY22, net revenues posted a growth of ~19% primarily on account of higher molasses and sugar sales. Sugar sales increased by ~11% due to volumetric growth while average sugar rates were slightly lower. Molasses sales almost doubled on the back of volumetric growth and higher average selling prices. Gross margins increased primarily as a result of economies of scale, improvement in sucrose recovery rates and increase in molasses rates. Profit before tax was reported lower due to substantial increase in finance cost, however, net margins improved due to tax credits recorded in the outgoing year. Financial risk profile weakened owing to decrease in cash flow coverages and elevated leverage indicators.

Gross margins declined due to lower average sugar prices while augmentation in finance cost mainly due to inflated markup rates resulted in losses during 1QMY23. Meanwhile, in full year, profitability profile is projected to improve considerably on the back of augmentation in topline primarily in line with higher sugar prices. Profit margins are expected to improve on the gross level whereas elevated finance cost is likely to put a drag on the bottomline. Achieving projected growth in sales and profitability is considered imperative. In addition, the ratings will remain sensitive to improvement in capitalization indicators and cash flow coverages to be in line with the benchmarks for the assigned ratings.

For further information on this rating announcement, please contact Ms. Tayyaba Ijaz, CFA at 042-35723411-13 (Ext. 8004) and/or the undersigned at 021-35311861-66 (Ext. 207) or email at info@vis.com.pk

Sara Ahmed
Director

VIS Entity Rating Criteria: Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.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 .