VIS reaffirms entity ratings of JDW Sugar Mills Limited

May 19, 2023 (MLN): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of JDW Sugar Mills Limited (JDWS) at ‘A+/A-1’ (Single A Plus/A-One), the company’s filing on PSX showed today.

The medium to long-term rating of ‘A+’ denotes good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy.

The short-term rating of ‘A-1’ denotes high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. The outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on April 15, 2022.

Assigned ratings incorporate JDWS's market position as the leading player in the country’s sugar industry, significant experience with sponsors in the sugar and agriculture sector, and a professional management team.

JDWS has longstanding relationships with growers along with a focus on research activities in sugarcane development. The business risk profile of the company draws support from the diversification of operations into the power sector. Sugar output in 2022-23 is expected to reduce owing to adverse impact on sugarcane crops 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 the sugar sector leading to competitive challenges for the company.

The ratings also take note of developments with regard to penalties imposed by the 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.

The revenue mix of the company is dominated by sugar and allied products, followed by the power division and corporate farms.

During MY22, the company recorded a modest growth in topline primarily led by higher molasses sales. Whereas sugar sales decreased by around 4% owing to relatively lower average selling prices while volumetric growth remained subdued.

Despite the slight improvement in the sucrose recovery rate, gross margins decreased mainly owing to lower average sugar prices during the outgoing year. In addition, elevated finance costs mainly due to sharp hikes in markup rates have impacted net margins.

The liquidity profile is underpinned by adequate cash flow coverage and working capital management.

 Gearing has remained manageable on the back of growth in equity due to internal capital generation and scheduled repayments of long-term loans. During 1QMY23, the gross margins declined to owe to depressed sugar prices amidst higher sugar stocks available in the country.

Meanwhile, in a full year, gross margins are expected to largely recover as a result of higher average sugar rates while inflated markup rates are likely to put a drag on the bottom line.

Maintaining liquidity and capitalization profiles at comfortable levels would remain imperative for the assigned ratings.

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