Financial Report 2019

BABA FARID SUGARCANE LTD.

Oaneali Channa | | 18th aug 2019

Q1)
What are the reasons of losses of baba farid sugarcane LTD?

Answer)

Baba Farid Sugar Mills operations had come to a near halt during last marketing year, as it
recorded lowest number of days (93) operated in at least past eight years, barely three months.
Crushing season in the country usually starts in November; however, even in recent years when it
has begun with a delay of nearly one month, due to growing scale of sugarcane crop at least last
up to four to five months up to mid-April. Low number of operation days is primarily a function
of firm's cash-strapped position, as the crop production in Okara district has been in excess of
annual crushing by the two mills in the district for several years now. Crop production in the
district exceeded crop crushing by 25 percent in MY17, suggesting sugarcane procurement cost
may have remained on the lower side of government set indicative rate.

Difference between national and firm's sucrose recovery rate has been progressively expanding
since MY14, touching ever highest of 1.25 percentage points as of last year. This means that for
marginal cost of producing white sugar from sugarcane for the firm is higher than the other
players' in the industry. This is because in order to produce every addition ton of sugar, the
company has to produce a greater amount of sugarcane compared to other players in the
company, requiring it to procure sugarcane in greater quantities, increasing its cost of production.

This has increasing reflected itself in company's bloating loss on gross level, which touched
negative 12.5 percent as of MY18. This pushed the company to struggle to keep its roof
overhead, considering that financial leverage alone stood at 13 percent of its revenue for the year.

While the previous owners had ploughed long term loans of Rs600 million to keep the company
afloat, as accumulated losses finally touched 50 percent of balance sheet position of September
30, 2018. In addition, deferred mark-up to sponsors on long term loans drawn touched Rs 1.3
billion, taking effectively liability to owners to a total of Rs 1.9 billion, or 64 percent of total
balance sheet value.

Note that as the company's property, plant and equipment had a total book value of Rs2.5 billion
as of reporting date, firm book value net of dues to sponsors (principal and markup) comes out at
Rs600 million. At Rs52 per share selling price, it appears that the assets have been sold at a
discount to their breakup value; or this may be reflective of other long-term dues to suppliers and
utilities.

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Q2)
Why the company still not shut down their operations despite continuous losses?

Answer)
It will be interesting to note if the sucrose recovery level of BFSML and cost of production
reflects rapid decline in coming period in the aftermath of the takeover. The sponsors have a
reputed profile in the industry, and not only have managed operations of existing mills but also
expanded to extraction of beet root sugar in KP province.

Furthermore, market intelligence suggest that the group may also have co-ownership interests in
other bottling franchises of Punjab province, however this could not be confirmed despite best
efforts.

In the interest of better disclosures of demand of sugar from beverage industry, it is hoped that the
company will not be taken private.

Q3)
Identify the major changes in the different head of cash flows, balance sheet and income
statements?

Answer)

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Items 2009 2010 results(%)

Sales 1,311 1,932

-32%

Cost of Sales (1,475) (1,737)

-15%

Gross Profit (164) 195

-184%

Administrative expenses (42) (38)

13%

Distribution Costs (2) (4)

-46%

Profit from core operations (209) 153

-236%

Other income/(expenses) - (1)

-100%

Earnings before interest & taxes (209) 152

-238%

Finance income/(cost) (170) (128)

33%

Profit before tax (378) 24

-1679%

Taxation Reversal/(liability) 4 6
-24%

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Net profit for the period (374) 30
-1366%

EPS (Rs) (39.58) 3.13

GP margin -12.49% 10.08% -ve

22.57

Operating margin -15.90% 7.91% -ve

23.81

EBIT margin -15.90% 7.84% +ve

23.74

PBT margin -28.85% 1.24% -ve

30.09

NPT margin -28.53% 1.53% -ve

30.06

Q4)
What are the companies strengths?

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Answer)
Sugarcane is the fourth largest cash crop grown in Pakistan which contributes to the
agriculture economy the crop value of Rs. 48,292 million. Its share in the large-scale
industry is 18% and 1.9% in GDP. Sugar industry ís contribution to the Government
exchequer in Federal excise duty is 11.2%. Average yield of sugarcane is 44 tons against the
world average of 60 tons per hectare. Pakistanís sugar mills crushing capacity is 58 million
tons of sugarcane capable to produce 5 million tons of refined sugar and 3 mill tons of
molasses. The mills still have utilized capacity of 34%.

Q5)
What measures do you recommend, which will help the company to overcome their
losses?

Answer)
The government should play the role for them here and they need to develop some strict
rules like;

a) Balanced policy for cultivation of four major cash crop ñ wheat, cotton, rice and sugar.

b) Indian variety of seed which has totally degenerated and diseased affect the production
yield should be avoided. Instead the government should import high- yielding varieties of
sugarcane from other countries for averting any sugar crisis in the future.

c) The government should make a publicity campaign for minimizing use of Gur so that a
substantial quantity of cane becomes available for crushing and making white spoon
sugar.

d) Sales Tax @ 15% is fixed on ex-factory price will further create problem for the
consumers whose purchasing power is already very low due to industrial sluggishness and
stagnant economy. It is suggested that sales tax should not be charged on market price.

Since de-zoning, the incentive of sugar mills to direct resources for development of good
variety cane in its area has almost diminished because the grower who have borrowed

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money from a sugar mill for development is free to take his sugarcane to any mill
irrespective of which mill advanced the loan for development. It is also one of the causes
of sickness of sugar industry.

They should hire more experienced staff.

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