Haq Bahu Sugar Mills (Private) Limited (HBSM)

The Pakistan Credit Rating Agency Limited / Sugar

Rating (May 2009)

Haq Bahu Sugar Mills (Private) Limited (HBSM)

Initial
Sukuks
Secured, privately placed
PKR 290mln / BBB-
PKR 50mln / BBB-

Financial Data

PKR (mln)

30-Sep-08 / 30-Sep-07
Total Assets / 2,285.2 / 977.2
Fixed Assets / 1,232.0 / 833.1
Equity / 609.1 / 350.3
Turnover / 482.9 / 221.7
EBITDA / 137.2 / 19.02
EBITDA/Interest / 1.95 / 0.90
Net Int. Cover / 1.2 / (0.3)
Total Debt/Equity (%) / 247.1 / 160.6

Analysts

Aisha Khalid

+92 42 586 9504

Jhangeer Hanif

+92 42 586 9504

Rating Rationale and Key Drivers

§ The rating reflects HBSM’s high risk profile emanating from its relatively leveraged capital structure, constrained cashflows and volatile dynamics of the industry in which the company operates. At the same time, underdeveloped corporate governance structure is also a key rating factor. Meanwhile, the rating takes into account the security structure of the instruments – first charge on fixed assets with 25% margin. This provides adequate cushion to the creditors.

§ The rating is dependent on sustainable supply line ensuring provision of quality raw material at competitive pricing. Meanwhile, any adverse changes in the economic environment constraining HBSM’s profitability and putting its cashflows and coverages under significant pressure would have negative implications for the rating.

Sukuk Structure

§ HBSM has issued two privately placed sukuk issues of PKR 50mln and PKR 290mln in August 2008 to acquire Al-Asif Sugar Mills Limited (ASML). The sukuk holders have first pari passu charge on all present and future fixed assets of HBSM with a margin of 25%. The directors of HBSM have also provided personal guarantees for redemption of sukuk. The PKR 50mln sukuk has a tenor of fifteen months with bullet principal repayment at maturity (i.e. November 2009). The profit rate is 3 months KIBOR plus 350bps with floor of 11% and cap of 30%, to be paid quarterly in arrears. The second sukuk of PKR 290mln has a tenor of three years (inclusive of 1 year grace period) carrying profit at the rate of 6 months KIBOR plus 325 bps with floor of 11% and cap of 30%, to be paid semi annually in arrears. The principal would be redeemed after the eighteenth month (beginning August 2010), in four consecutive semi-annual installments.

Assessment

§ HBSM commenced commercial production during 2007. Since the company was not able to fully utilise its plant capacity, it had to incur a slight gross loss. With other operating costs and financial charges, the company registered a net loss of PKR 30mln in FY07. During FY08, HBSM, taking benefit of higher capacity utilization, improved its gross margins. The company’s leveraging increased significantly on account of i) capex/working capital requirements relating to HBSM’s business, and ii) debt related to acquisition of ASML. However, as the company has on lent the acquisition loan to ASML (PKR 540mln @ 6 months Kibor plus 400bps), it has no impact on the company’s profitability. Benefiting of improvement in its core business, HBSM’s net income reached at PKR 21mln at end-Sep08.

§ Going forward, the company intends to fully tap its expanded capacity while capiatalizing on the existing gap between sugar supply and demand in the county. The increase in the inventory at end-Sep08 was indeed made keeping this gap in perspective, which was fully sold subsequently at higher prices. During FY09, the management anticipates offtake of entire production before the year end. Meanwhile, ASML, with its strong production related fundamentals, is likely to make timely interest payment to its parent, thereby avoiding any significant burden on its cashflows.

§ Because of initial stage of operations and higher inventory, (an outcome of cyclicality of sugar industry), the company’s cash flows from operations were under pressure at end-Sep08. This pressure is likely to continue for some time. However, with expected increase in business volume and better profitability, cashflows are expected to improve gradually.

§ Apart from the working capital borrowings, HBSM’s capital structure is relatively leveraged mainly on account of long-term borrowing. With repayment of loans, the company’s leveraging is expected to improve, as the management is not projecting any major new capex, going forward.

Profile

§ Haq Bahu Sugar Mills (Private) Limited, incorporated in September 2003, started its commercial production in 2007. The primary business of the company is manufacturing and sale of white crystalline sugar. HBSM is the part of Macca Group. The group owns the company through its flagship company – Macca Sugar Mills (Pvt.) Limited (MSML) – and through direct shareholdings of the group members. HBSM recently enhanced its crushing capacity from 3,000 tons of cane per day (TCD) to 5,200 TCD. The group acquired another sugar mill in 2008 – Al-Asif Sugar Mills Limited (ASML). The company is listed on Karachi and Lahore Stock Exchanges and has nameplate crushing capacity of 3000 TCD.

§ HBSM’s BoD, comprising four members including the Managing Director (MD), consists of key sponsoring individuals. Mr. Muhammad Irshad Butt, the chairman of the board, is also the founder of Macca Group. The Managing Director, Mr. Riaz Qadeer Butt, son of Mr. Irshad Butt, is also the MD of MSML. He, with more than two decades of trading experience, manages the financial and administrative affairs of both companies.

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Tel: 92 (42) 5869504 Fax: 92 (042) 5830425 www.pacra.com

The Pakistan Credit Rating Agency Limited / Sugar
Eden Developers (Private) Limited –April 2008 / Page 2 of 3

Tel: 92 (42) 5869504 Fax: 92 (042) 5830425 www.pacra.com