FINANCIAL AND STRATEGIC ANALYSIS OF

BABA FARID SUGAR MILLS LIMITED

Financial Reporting & Analysis – Project (Phase 2)

Submitted To:
Dr. Atif

Submitted By:
Tooba Irfan (18L-3095)
MBA Section A

Date: 22nd April 2019

National University of Computer & Emerging Sciences

7.3.3. Opportunities...........................................................................................................................27
7.3.4. Threats.....................................................................................................................................28
[DATE]
8. CONCLUSION....................................................................................................................................29
[COMPANY NAME]
BIBLIOGRAPHY...................................................................................................................................30
[Company address]

0
1. INTRODUCTION TO SUGAR INDUSTRY

Sugar industry, ranked as the second largest agro based industry in Pakistan, is a significant

source of earnings for the government of Pakistan [CITATION Sha18 \l 1033 ]. Currently, Pakistan

stands at 5th position in the world in terms of sugarcane cultivation area whereas it is ranked 6 th in

terms of sugarcane production and 9th in terms of sugar production [CITATION Sae13 \l 1033 ].

About 1.2 million hectares area is utilized for sugarcane production in Pakistan and this

sugarcane is then supplied as a raw material to 89 sugar mills all over Pakistan [CITATION Sha18 \l

1033 ]. Out of all four provinces, 65% of sugarcane cultivation area is in Punjab, 25% is in Sindh

while only 10% is in KPK [CITATION Sha18 \l 1033 ]. Two seasons are suitable for sugarcane

plantation i.e. autumn or spring. In Punjab and KPK, plantation is usually done in spring whereas

in Sindh, it is done in autumn.

Despite huge areas of sugarcane cultivation, sugarcane’s yield per hectare is still very low in

Pakistan. This is due to a number of factors including water shortage, lack of good quality

fertilizers and high yielding variety seeds etc. [CITATION Sha18 \l 1033 ]. Being the 8th largest sugar

consuming nation in the world [ CITATION JCR18 \l 1033 ], Pakistan needs to take advantage of

research to increase the yield per hectare. High population growth rate is a major reason for the

growth of domestic sugar consumption. In the fiscal year 2017, 25.7 kg of per capita sugar

consumption was projected [ CITATION JCR18 \l 1033 ]. Processed food sector is a source of

revenue for sugar and allied industry as it accounts for 60% of domestic sugar consumption in

Pakistan [ CITATION JCR18 \l 1033 ].

Overall, 89 sugar mills are operational in Pakistan, majority of which are members of Pakistan

Sugar Mills Association (PSMA), which represents all sugar mills of Pakistan [ CITATION

1
PSM19 \l 1033 ]. The sector has been under pressure lately, due to excess supply of sugar in the

market. Furthermore, due to low selling prices, the industry players increased the inventory

holding period and short term debts which is another sign of poor performance [ CITATION JCR18 \l

1033 ]. The financial health of this industry is expected to worsen in future due to more sugar

supply [ CITATION JCR18 \l 1033 ].

2. OBJECTIVES

This study aims to analyze Baba Farid Sugar Mills Limited (BAFS) in terms of its financial

position and performance over 5 years i.e. 2014 to 2018. Following are the objectives of this

study:

 To analyze the profitability trends of BAFS over the five years

 To analyze the company’s liquidity and solvency position

 To check how efficiently the company utilizes its assets

 To perform a 3-tier strategic analysis of the company by focusing on impact of external

shocks and Porter’s Five Forces on concerned industry

 To figure out the strengths, weaknesses, opportunities and threats of the company

3. INTRODUCTION TO SELECTED COMPANY

3.1. Company Profile

Baba Farid Sugar Mills Limited is one of the leading refined sugar manufacturers in Pakistan.

The company was founded in 1978 and was named after the famous Sufi – Baba Farid

Shakarganj Rehmatullah Alleh, who belonged to Pakpattan [ CITATION Bab16 \l 1033 ]. The

company is listed under Pakistan Stock Exhange under the ‘Sugar and Allied Industries’ sector

with quotation of shares on Karachi, Lahore and Islamabad Stock Exhanges [ CITATION Pak19 \l

2
1033 ]. This company comes under the Imporient Group with the head office located in Lahore

and sugar mill in Okara [ CITATION Imp19 \l 1033 ]. This company is a member of Pakistan Sugar

Mills Association as well as of Karachi, Lahore and Islamabad Chamber of Commerce &

Industry [ CITATION Bab16 \l 1033 ].

3.2. Current Situation

Currently, the company is not profitable at all due to minimum support price of sugarcane

maintained by the Punjab Government [CITATION Bab18 \l 1033 ]. The situation is quite

challenging and tough for the sugar industry nowadays due to high production cost and

inefficiencies in production. The company suffered a huge loss recently especially due to high

finance cost [CITATION Bab18 \l 1033 ]. The purchase price per 40 kg of sugarcane is PKR 140

currently and a crackdown has been started against sugar mills purchasing sugarcane at prices

other than the fixed price [ CITATION The182 \l 1033 ]. Baba Farid Sugar Mills is one of those

sugar mills which refused to purchase sugarcane at fixed prices stated by the government

[ CITATION The182 \l 1033 ] . With an annual production capacity of 480,000 Million tons, Baba

Farid Sugar Mills utilizes only 3.8% of this capacity for actual production [CITATION Bab18 \l

1033 ].

4. RESEARCH QUESTIONS

Following are the key questions for this study:

 What is the trend of financial performance of company from 2014 to 2018?

 What is the impact of external factors on sugar industry as a whole?

 What is the future direction of profitability for the company?

 What are the strengths and weaknesses of the company?

3
5. RESEARCH METHODOLOGY

5.1. Data Collection Sources:

This research comprises of both quantitative and qualitative aspects. The quantitative part is

about ratio analysis of Baba Farid Sugar Mills’ financial data of 5 years. This part requires

collection of annual reports of the company for the years 2014 to 2018. The data for this part has

been collected from company’s website and other internet sources. The qualitative part of this

research includes the 3-tier strategic analysis covering the economy, industry and the firm. For

qualitative analysis, the secondary sources of information were used including journal articles,

news articles, website documents (Sector overview from PSX), annual reports and Pakistan

Sugar Mills Association (PSMA).

5.2. Data Analysis Techniques

The research questions have been answered through different techniques. The first question has

been answered with the help of financial ratio analysis and graphs. The second question has been

answered through PESTLE analysis. The third research question has been addressed using the

Porter’s five forces model. The last question has been answered through detailed SWOT analysis

of the company.

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6. FINANCIAL ANALYSIS

Trend analysis technique has been used in this study to compare the performance of company

over a period of 5 years with the base year i.e. 2014. There are 5 different categories of ratios

including profitability, liquidity, solvency, activity and valuation ratios. All of these have been

calculated and analyzed to make conclusions about the company’s performance.

6.1. Profitability Ratios

5
 Quarterly Profitability Ratios
30.00%
20.00%
10.00%
0.00%
2017-Q1 2017-Q2 2017-Q3 2017A 2018-Q1 2018-Q2 2018-Q3 2018A
-10.00%
-20.00%
-30.00%
-40.00%
-50.00%

Gross Profit Margin Net Profit Margin

Operating Profit Margin

Gross Profit Margin:

As compared to the base year, the gross profit margin kept fluctuating over the 5 years till 2018.

In 2015, the gross profit margin declined due to decreased sales and increased cost of production.

The sales of company reduced due to higher purchase price fixed by the government which was

not in line with the low sales price of sugar in market [ CITATION BFS15 \l 1033 ] . Other reasons for

low sales include reduction in sugar recovery as compared to base year and less utilization of

production capacity of the plants. Due to lack of incentives for export, sugar export was limited

[ CITATION BFS15 \l 1033 ] . Moving forwards, in 2016, the margin increased suddenly due to

greater number of operational days, increased sucrose and molasses recovery etc. [ CITATION

BFS16 \l 1033 ]. Year 2017 was a great year in terms of gross profits as they grew by 39.92% due

to increased export sales [ CITATION BFS17 \l 1033 ]. 2018 was the worst year in terms of gross

profit margins due to decreased sales caused by a smaller duration of crushing season, drop in

the amount of sugarcane crushed and decreased sugar recovery. All these problems were caused

due to technical issues of powerhouse, transformer, turbine etc. [ CITATION Bab18 \l 1033 ].

6
In the quarters of 2017, the margins had an increasing trend from quarter 1 to quarter 3 with the

highest in 3rd quarter due to end of crushing season. There was a growth in sugarcane crushed

leading to increased sales. Overall, the financial performance in quarters was good leading to a

good financial position in 2017. However, the performance declined in the quarters of 2018 (2 nd

quarter being the worst quarter among the three). This was due to reduction in amount of crushed

cane because of failure of power generator. Also, bagging of sugar could not start in the first

quarter due to technical faults [CITATION BFS171 \l 1033 ]. This was followed by declining margins

caused by reduction in sales price as well as surplus production of sugar [ CITATION BFS18 \l

1033 ].

Net Profit Margin:

The sugar sector went through the worst crisis ever in 2015 and incurred huge losses as

compared to the base year, which is clear from the graphical representation (low net profit

margin). The losses occurred due to decline in sugar prices throughout the world [ CITATION

BFS15 \l 1033 ]. The company’s net profit margin increased in 2016 due to reduction in selling

and distribution costs as well as finance cost and increase in other income. Furthermore, the

company’s increased sales led to an increase in net profit margin in 2017 followed by a rapid fall

in net profits mainly due to low sales price and increase in finance cost in 2018 [ CITATION

Bab18 \l 1033 ]. The net profit margin was at its best in 2 nd quarter of 2017 and 3rd quarter of 2018

due to increase in sugarcane crushed and lack of operating expenses respectively.

Operating Profit Margin:

Operating profit margins had the same trends as gross profit margins. These margins were low in

2015 due to low gross profit margins, but they were better in 2016 and 2017 due to increased

7
sales and reduction in operating expenses. 2017 was the year when changing weather patterns

and heavy rainfall convinced the growers to grow a water resistant crop that brings stable returns

[ CITATION Sta17 \l 1033 ]. The margins were the least in 2018 as compared to base year due to

less attention paid to the sector and uncompetitive export of sugar due to no subsidy provision

[CITATION Sta181 \l 1033 ]. The performance during quarters was the worst in 3rd quarter of 2018

due to very low sales as compared to previous quarters because of technical failure. Also, due to

cost of sales exceeding the sales, the margins were very low in all quarters of 2018.

Return on Equity and Return on Assets:

Return on equity has quite an unstable trend throughout the 5 years. The return was negative in

2015 due to occurrence of huge net loss in the year. The ROE improved in the following two

years due to improved production of sugar and high recovery rates leading to considerable net

profits. Improved asset turnover ratio in 2017 was another reason for an improved ROE.

However, the ROE declined drastically in 2018 again due to heavy losses incurred during the

year on account of increased reliance on debt financing and decreased sales. Such low returns on

8
equity indicate poor profitability position of the company. Also, it depicts that company was

unable to use its investments effectively to generate growth.

Return on assets has a stable trend throughout the years but with very low values. This was again

due to very low net income of the company as compared to the assets. Net losses in years 2015

and 2018 resulted in negative ROA indicating how unprofitable the company’s assets were in

generating revenue. Such low ROAs also indicate that the amount of assets was not sufficient

enough to generate income for the company.

Quarterly Returns
20.00%
10.00%
0.00%
2017-Q1 2017-Q2 2017-Q3 2017A 2018-Q1 2018-Q2 2018-Q3 2018A
-10.00%
-20.00%
-30.00%
-40.00%
-50.00%
-60.00%
-70.00%
-80.00%

Return on Equity Return on Assets

In the quarters of 2017, ROE was the highest in 2 nd quarter due to highest net income generated

during that quarter. However, in 2018, the ROE was negligible in 1 st quarter due to net loss

which further decreased in 2nd quarter due to huge net loss. The 3 rd quarter was a bit better than

the previous one due to improved earnings. ROA was almost constant throughout the 2017

quarters but much lower in 2018 quarters due to huge net loss reported. Low ROA is an

indication of this company’s inability to make income from use of its assets.

Profitability Conclusion:

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The company’s profitability has decreased over the years as compared to 2014 (the base year)

with the exception of 2017 as evident from the ratios explained earlier. Overall, the net profit

margins have decreased which indicates that the company was not efficient at converting sales

into profits. High inflation, devaluation of currency, political instability, decreased sugar

recovery rates, shortened duration of crushing season and high fuel prices were the major reasons

for decline in profitability of the company over the years.

6.2. Liquidity Ratios

Current Ratio:

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Company’s current ratio has an unstable trend over the 5 years as compared to the base year. The

ratio decreased in 2015 mainly because the current liabilities exceeded the current assets. There

was a reduction in company’s current assets specifically in stock in trade and trade debts. The

company must have reduced credit sales, moreover, the company’s trade and other payables

increased substantially in 2015 (due to late payments to farmers) leading to a current ratio less

than 1. Although, the current ratio increased in 2016 and further in 2017, but it still remained less

than 1 indicating company’s incapability to pay back its short term obligations. In 2018, the ratio

fell below 0.3 (worst scenario as compared to base year). This depicts that the company is not

able to pay its short term liabilities using its current assets.

During the quarters of 2017 and 2018, the current ratio was the highest in 2 nd quarter of 2017 and

1st quarter of 2018 respectively. This is because the company’s stock in trade increased

considerably in 2nd quarter of 2017 along with a reduction in short term borrowings. In 2018, the

2nd and 3rd quarters experienced a decline in current ratio due to reduction in stock in trade and

increase in interest and markup. The company started relying on debt financing in 2018, hence,

its ability to meet its short term obligations reduced.

Quick Ratio:

The company’s ability to pay back its short term liabilities using liquid assets was even lesser

due to the ratios being less than 1 but even lesser than current ratios. Current liabilities greater

than current assets caused the ratios to decrease. The quick ratios increased a little over the 5

years but the increment was almost negligible, indicating that the company relies more on

inventory or other less liquid assets to pay its short term liabilities. The quick ratios of quarters

were also less than 1 which means the company had limited ability to pay off its short term

liabilities even during quarters.

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Cash Ratio:

The company’s cash ratio was almost zero in the base year and remained constant throughout the

next 4 years. Such a negligible cash ratio indicates that the company is totally unable to pay off

its short term debts using the most liquid assets i.e. cash and marketable securities. Similar trend

was observed during quarters i.e. cash ratio remained almost zero throughout. This was because

the company’s cash balance was very low during all these years.

Liquidity Conclusion:

The company’s liquidity position has worsened over the years as compared to the base year. The

major reason was that current liabilities exceeded the current assets. This shows that the

company might not be able to realize its assets and discharge its liabilities in the normal

progression of business. The company needs to improve its working capital management in order

to improve its ability to easily pay off the current liabilities using current assets and to continue

as a going concern.

6.3. Solvency Ratios

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Debt to Equity Ratio:

The company’s debt to equity ratio increased in 2015 as compared to the base year due to

company’s increased reliance on debt financing. The ratio decreased in 2016 and remained

constant in 2017 which was a sign of company’s low financial risk as compared to previous

years. The ratio increased to 8.0 in 2018 indicating increased reliance on debts for financing as

evident from increased interest and markup in 2018. Increasing debt to equity ratios indicate lack

of ability of the company to pay long term liabilities however the company was able to enjoy tax

benefits. In the quarters, debt to equity ratio remained constant during 2017, at a satisfactory

level but the ratio increased significantly in 2nd quarter of 2018 due to a huge increase in

liabilities indicating that the company relied heavily on debts to finance its operations rather than

on fully owned funds.

Debt to Assets:

The debt to asset ratio of the company is quite low and remained almost constant after the base

year in all 4 years. Such low ratios are an indication of company’s ability to meet its obligations

13
by selling its assets if required because its assets exceed the liabilities. Lower debt to asset ratios

are considered better ratios in terms of riskiness, hence, the company has low financial leverage

as compared to its assets. During the quarters, the ratio remained stable and low in all 6 quarters

which depicts the company’s commitment to maintaining a good solvency position.

Financial Leverage Ratio/ Equity Multiplier:

The equity multiplier has a fluctuating trend over the years in comparison to the base year. It

increased in 2015 from 7.04 to 8.52 due to increase in liabilities of the company. The higher

equity ratio indicates that the company financed its assets more with debt as compared to

owner’s investments. Higher ratios mean more financial risk. However, the ratio declined in

2016 with a further reduction in 2017 due to low financial leverage as compared to the base year

but the company was still not at a good financial position. The declined ratio indicated

company’s reliance on equity for asset financing. But, the ratio increased again in 2018

portraying company’s high financial leverage for the year. This happened due to reduction in

equity on account of reduced retained earnings as the company incurred a huge loss in 2018.

Substantial increase in interest and markup indicates that the company increased its debts

resulting in high financial leverage. In 2017, the equity multiplier remained constant during the

quarters, but then it increased in the 2nd quarter of 2018 followed by another drastic increment in

3rd quarter of 2018 due to greater debt financing.

Solvency Conclusion:

Overall, the company is not at a good solvency position due to considerable increase in debt

financing with very high financial leverage ratios. Debt to assets ratio were observed to be fine

but other ratios simply indicate that the company has a high financial leverage. The shareholders

14
do not own majority of company’s assets. The company’s capital structure needs to be improved

and if situation continues to be the same, company might start defaulting on its debt obligations

in future leading to total insolvency of the company.

6.4. Activity Ratios

Asset Turnover Ratio:

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The asset turnover ratio of the company has been less than 1 throughout the 5 years. As

compared to the base year, the asset turnover ratio increased slightly in 2015 followed by a

considerable reduction in 2016 and an increment in 2017 (still less than base year). In 2018, the

ratio declined again. Overall, it was a decreasing trend indicating company’s inability to manage

its assets efficiently due to management or production problems. As the company sales declined

in 2018, the company was only able to generate 44 paisas for every 1 rupee worth of assets. This

clearly indicates that the sales of company were less than its assets because the company could

not generate enough returns on its assets. Also, the company’s assets reduced in the later years

therefore the company could not generate much sales through assets.

In quarters, similar trends were observed both in 2017 and 2018. In both the years, ratio was

better in the 2nd quarter, however still very low indicating company’s inefficient way of utilizing

its assets. The company’s decreased sales, increased trade debts and poor asset management are

all the reasons for such low asset turnover ratios.

Cash Cycle:

2014 2015 2016 2017 2018

Account Receivable Turnover Ratio 10.12 12.04 12.19 16.79 9.62
Avg Collection period 36.08 30.30 29.95 21.74 37.94
Account Payable Days 1.57 1.50 0.81 1.13 1.01
Avg payment Days 232.25 243.90 450.75 323.79 361.72
Inventory Turnover 2.46 3.72 3.55 3.80 5.04
Days of inventory 148.23 98.01 102.86 96.02 72.35
Operating Cycle 184.31 128.32 132.81 117.76 110.29
Cash Cycle -47.94 -115.59 -317.93 -206.03 -251.43

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As compared to the base year, the company’s cash cycle has worsened over the next 4 years. It

remained negative and increased negatively indicating that the company received cash from

customers before it paid its suppliers for inventory. During the quarters as well, the cash cycle

remained negative. Negative cash cycles can be better explained through the 3 elements as

follows:

 Average collection period: The average collection period has been decreasing till 2017

after the base year with a considerable increase in 2018. The shortened period for

collections indicate that the company’s ability to collect cash from its customers quickly

improved. However, the company was not able to collect cash quickly in 2018.

 Days of inventory on hand: There was an improvement in inventory turnover ratio over

the years which resulted in less number of days of inventory on hand. The effective

management of inventory was the reason for improved inventory turnover ratios. Less

number of days for inventory in hand along with shortened collection period reduced the

operating cycle of the company.

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  Average payment days: The average payment days have been increasing since the base

year except 2017 (little reduction). This indicates that the company takes a lot of time to

pay back its suppliers. It is also to be noted that the payment days are far more than

collection period which means the company takes more time to satisfy its debt

obligations than to collect receivables. In 2017 and 2018, the payment period was the

longest in 3rd quarters, hence, the cash cycle was extremely negative in these quarters.

Overall, the company’s efficiency in terms of paying its suppliers on time has declined. The

company takes a much longer time to pay its creditors as compared to collecting cash from

customers. Although the inventory management improved over time but the days of inventory on

hand are still very high which can be improved by turning over inventory faster. The cash

conversion cycle is negative mainly due to poor payable management system where there is no

check on whether the invoices are paid as close to the due dates as possible.

Interest Coverage Ratio:

This ratio has a fluctuating trend over the years as compared to base year. The ratio declined and

became negative in 2015 due to losses incurred. The ratio increased in 2016 due to improved

EBIT and lower interest expense. This increased further in 2017 due to high profits earned,

however, the ratio decreased and became negative in 2018 indicating company’s inability to pay

off its interest obligations using its earnings before interest and taxes.

Activity Conclusion:

The company’s reducing asset turnover ratios and negative cash cycles are an indication of

inefficient asset utilization and payable management processes of the company. The company

18
needs to improve its activity ratios by increasing sales, finding ways to utilize assets efficiently,

accelerating collections and improving inventory and payable management systems.

6.5. Investors Ratios

Earnings per Share:

The overall trend of EPS observed is very alarming for the company. In the base year, the

company’s EPS was 0.92 which means the company’s earnings were less than its number of

19
shares. The EPS decreased substantially to -21.03. This happened due to net loss incurred by the

company in 2015 indicating less value. Afterwards, the company managed to increase its EPS in

2016 and 2017 due to increased sales and high profits. However, the EPS declined with a great

extent in 2018 to -39.58. This indicates that the company was unable to make profits per

outstanding shares effectively, resulting in less worth of shares of stock. Low EPS is also an

indication of company’s incapability to generate significant dividends for its investors due to

poor financial health.

During the quarters of 2017, EPS increased in 2nd quarter but was almost negligible in 3rd quarter

due to very low profit margins. In 2018, the situation was quite poor in terms of profitability

during quarters, which resulted in negative EPS in the first 2 quarters followed by a little

improvement in 3rd quarter.

Price to Earnings Ratio:

Price to earnings ratio has a decreasing trend as compared to base year, the exception being a

high ratio in 2016 due to increased share price and better earnings. However, the ratio had a

downward trend after 2016, especially in 2018 due to fall in share price recently because of

political instability and due to net loss incurred. Overall, the low P/E ratios indicate that the

investors might not get attracted to invest in the company due to expectation of lower earnings in

future. The market value of stock as compared to company’s earnings is quite low depicting that

the company is not worth investing into.

Investors Conclusion:

The valuation ratios serve as a source of evaluating company’s investment potential. As

explained above, the company faced huge losses recently and a decline in its share price further

20
worsened the situation. The company’s value declined as indicated by low EPS and low P/E

ratios. Investor confidence has been lowered due to poor financial health of the company and less

worth of company’s shares.

7. STRATEGIC ANALYSIS

7.1. PESTLE Analysis

7.1.1. Political

The sugar industry is highly dominated by powerful politicians because majority of the sugar

mills in Pakistan are owned or co-owned by them or their relatives [ CITATION The183 \l 1033 ].

Government policies play a major role in regulating the sugar industry as they keep changing the

policies to gain more benefits. For instance, Shahbaz Sharif’s government attempted to lift the

ban on establishment of new sugar mills as well as on relocation of existing mills [ CITATION

Daw17 \l 1033 ]. Other than Sharif brothers, sugar mills are also owned by other political

families. After textiles, sugar sector is the second largest agro based sector, developing and

growing under political influence since very long. These politicians protect the industry by

placing tariff and non-tariff restrictions on imports and through subsidies to keep the prices

discounted [ CITATION Daw17 \l 1033 ]. Moreover, the provincial governments support several

programs such as Research & Development, technology transfer programs and training programs

in order to increase sugarcane yield [ CITATION JCR18 \l 1033 ].

However, political instability and rising corruption in Pakistan are the two challenges for sugar

industry currently. Every politician comes up with a new policy and create artificial shortages by

holding large quantities of sugar just to raise its price [ CITATION The183 \l 1033 ].

21
7.1.2. Economic

High inflation and devaluation of Pakistani currency are the economic factors which affect the

sugar industry. Pakistani currency is depreciating day by day resulting in high inflation rate and

economic instability [ CITATION Daw17 \l 1033 ] . Cost of production is increased due to high

inflation rate which reduces the profit margins due to fixed prices. This is exactly what is

happening with sugar industry. Neighboring countries such as India and China offer sugar at

better (lower) prices, which reduces investors’ confidence to invest in highly political Pakistani

sugar industry [ CITATION Khu11 \l 1033 ] . The government of Pakistan is responsible for deciding

the export/import of sugar and Pakistan has been successful in producing exportable surplus

since last 6 years [ CITATION Abb19 \l 1033 ] . In 2018, due to increased production and low

domestic demand, Pakistan exported 1.5 M tons of sugar which was subsidized by the

government [ CITATION Abb19 \l 1033 ] . Recently, Dubai has emerged as a sugar exporter and this

can become a reason for declining sugar exports of Pakistan in 2018-19 [ CITATION Reh18 \l

1033 ]. Sugar industry plays its part in creating employment opportunities for almost 3.9 million

people along with a good contribution to GDP [ CITATION She19 \l 1033 ].

7.1.3. Social

Due to a high population growth rate of almost 2% [ CITATION Pak191 \l 1033 ] and growing

middle class, new consumption patterns have emerged [ CITATION JCR18 \l 1033 ]. The growing

population of Pakistan living a quality lifestyle with increased eating habits has led to greater

consumption of sugar, especially due to the growing food processing sector. The demand of

sugar from this sector is quite high i.e. 60% due to the production of ice-cream, soft drinks,

bakery items etc. [ CITATION JCR18 \l 1033 ]. Although, many people are becoming diet conscious

nowadays and consume less sugar to stay fit and healthy, but still the estimated consumption of

22
sugar for the coming years is high [CITATION Sae13 \l 1033 ]. People in Asian countries, especially

Pakistanis are obsessed with sweets, thus favoring sugar consumption. The per capita sugar

consumption is very high in Pakistan as compared to India, China and Bangladesh [CITATION

Cha10 \l 1033 ]. These factors affect the sugar industry mostly positively.

7.1.4. Technological

Latest technology adoption turns out to be a success story for almost every industry. Sugar

industry has to some extent benefited from and can continue to take advantage of suitable

technologies to increase productivity [ CITATION Khu11 \l 1033 ]. Use of modern technology helps

the industry in a number of ways such as reduced production costs, improved quality of output,

increased yield etc. Changes in technology from time to time leads to a competitive rivalry

because some sugar mills adopt latest technology earlier and create a competitive edge. One

problem with technology is that farmers usually are not familiar with their use due to lack of

education, so they avoid using technology [ CITATION Rah09 \l 1033 ]. Despite a strong agricultural

base, the industry still is not able to utilize the full production capacity due to slow technological

progress and lack of research in sugarcane technology. Some sugar mills have been able to adopt

technological advancements for some processes such as cane juice extraction but under-

utilization of capacity still remains [ CITATION Khu11 \l 1033 ].

7.1.5. Legal

Different acts and orders regulate the sugar industry such as The Sugarcane Act 1934, The

Central Excise Duty on Sugar Ordinance, 1979 etc. As the sugar industry is highly under control

of politicians of Pakistan, their supportive policies play an important role to attract investors as

well as to encourage farmers to produce more [CITATION Sae13 \l 1033 ]. Furthermore, the

Economic Coordination Committee of Cabinet (ECC) encourages export of sugar which

23
ultimately leads to higher sugar prices [ CITATION Sae13 \l 1033 ] . Recently, the profit margins of

sugar producers have been reduced due to improper cost analysis of sugar by government. Many

sugar producers complain that sugar price is not increased proportionally to support price of

sugarcane which worsens their financial position due to low profit margins and liquidity

problems [ CITATION Sae13 \l 1033 ].

7.1.6. Environment

Sugar production depends on the seasons; autumn is preferred over spring due to high yields

[ CITATION Naz13 \l 1033 ]. Throughout the world, sugar is produced mainly from sugarcane while

at some places through sugar beet as well. Due to rise in annual consumption, sugar production

has increased worldwide which impacts the environment in many ways. It results in loss of

natural habitats and water due to its excessive use [ CITATION WWF05 \l 1033 ]. Moreover, use of

pesticides and fertilizers pollute the environment which is a concern of many people living in the

country. However, sugarcane is required for sugar production and since it contributes a good

amount to Pakistan’s GDP, its production is encouraged in Pakistan [ CITATION Hus18 \l 1033 ].

Environmental conditions such as natural disasters, climate change, global warming, extreme

rainfall, temperature stress and greenhouse gas emissions limit the sugarcane productivity in

Pakistan [ CITATION Hus18 \l 1033 ]. According to Research & Development department of Lahore

Chamber of Commerce & Industry, sugar production is badly affected in Pakistan due to water

shortage, lack of agricultural research and absence of high yielding varieties of seeds.

7.2. Porter’s Five Forces Model

7.2.1. Threat of New Entrants – Low

As already mentioned, the sugar industry is highly dominated by political figures of Pakistan.

Most of the sugar mills are owned by the politicians [ CITATION The183 \l 1033 ]. Thus, it is

24
difficult for new entrants to penetrate into the industry. However, entering the industry does not

require huge investments and the raw materials are easily available. But, total government

influence in the sector is the reason for low threats of new entrants.

7.2.2. Bargaining power of suppliers – High

Raw material suppliers i.e. farmers are the major suppliers of sugar industry. They provide

sugarcane which is further used by sugar mills to process it into refined sugar. The government

usually keeps the purchase price of sugarcane fixed but the sugar mills have to purchase it no

matter how high the prices climb [ CITATION Khu11 \l 1033 ]. This is because sugarcane is an

essential raw material for sugar production and sugar is a basic commodity. The government

discourages those manufacturers who do not purchase the raw material at the price fixed by

them. For instance, a crackdown was launched against the mills which violated the fixed price

rule [ CITATION The183 \l 1033 ]. Hence, the bargaining power of suppliers is quite high.

7.2.3. Bargaining power of buyers - Low

The buyers of sugar industry include the food processing sector (which demands 60% of sugar

produced in Pakistan for manufacturing products such as bakery items, sweets, ice-cream etc.)

and the general public for whom sugar is a basic need of life [ CITATION JCR18 \l 1033 ]. There is

hardly any substitute for sugar in the market and as sugar is required for preparing different food

items in daily lives, hence, the buyers are always ready to buy sugar at any price. Most of the

sales of sugar in Punjab is done through wholesale network while the rest through domestic

companies. In Sindh, a additional channel is used for sugar sales by sugar mills i.e. export of

sugar [ CITATION Khu11 \l 1033 ]. As there is no substitute for sugar, people buy sugar irrespective

of the high rates, thus the bargaining power of buyers is low.

25
7.2.4. Threat of Substitutes - Low

Although there are currently lack of substitutes for sugar in the market, but since 5 to 6 years,

sugar beet has been recognized as a good alternative to sugarcane for sugar production. This can

act as a threat for sugar mills (producing sugar from sugarcane) because this crop avoids water

shortage due to less water consumption [ CITATION Daw13 \l 1033 ]. Also, it ensures a high yield

per acre due to maximum land utilization. SMEDA, after completing its mission of finding facts

about beet cultivation, reported that the country’s ability to produce enough sugar from cane

would be reduced in near future [ CITATION Daw13 \l 1033 ]. Growth in cultivation area of sugar

beet can be beneficial hence this can be a big threat for sugar industry in future. Artificial

sweeteners also exist but they are still not a powerful substitute for sugar.

7.2.5. Threat of Rivalry among firms – Medium

The sugar mills compete with each other on the basis of market capitalization and quality of

sugar produced. The government plays a major role in setting prices of sugar which are fixed for

the entire industry, hence there is no competition based on price [ CITATION Khu11 \l 1033 ].

Rivalry may exist between the producers in terms of distribution channels e.g. some mills are

exporting sugar while some are not, which can act as a competitive edge for the company

earning revenues through export of sugar as well. The competition exists among the influential

politicians who own the sugar mills [ CITATION Kha19 \l 1033 ].

7.3. SWOT Analysis

7.3.1. Strengths

 Short average collection period is one of their strengths as they are able to collect cash

from customers in less time which is desirable (identified through ratio analysis).

26
  Better inventory management is also their strength due to less number of days for

inventory in hand, which indicates that the company quickly turns inventory into cash.

Due to this, company has improved operating cycle (identified through ratio analysis).

 Company conducts workshops and on the spot training of farmers to teach them different

techniques for increasing yields and profits for the overall company and shareholders

[ CITATION BFS17 \l 1033 ].

7.3.2. Weaknesses

 Reliance on government policies due to high government intervention in the whole sugar

industry negatively impacts the overall performance of this company. This happens when

the sugarcane prices fixed by government are not in line with sales price of sugar,

resulting in reduced margins [ CITATION Khu11 \l 1033 ].

 The company does not have any competitive edge over its competitors (not even in terms

of price), because prices are set by government and the companies do not have any

pricing power [ CITATION Khu11 \l 1033 ].

 Lack of capacity utilization is another weakness of the company. This is mainly because

sugar production is a seasonal operation. The company’s recent decline in sales indicate

low yield per acre due to minimum utilization of cultivation area [CITATION Bab18 \l

1033 ].

 Limited use of modern technology due to limited financial capabilities of farmers

resulting in lower yields [ CITATION Abb19 \l 1033 ].

7.3.3. Opportunities

 The healthy rate of population growth of Pakistan is itself a big opportunity for the

company. High population growth rate and income prosperity indicates that the demand

27
 for sugar will continue to grow in future no matter how high the price be [CITATION

Sha18 \l 1033 ]. This can lead to growth of the company in future.

 Investment in Research & Development department can bring good outcomes for the

company as there is lack of agricultural research in Pakistan at the moment [ CITATION

The183 \l 1033 ]. By giving attention to this area, the company can come up with plans to

improve overall sugar production such as brining new varieties of seeds. These

innovative strategies can make them compete with the global sugar industry as well

[ CITATION Daw18 \l 1033 ].

 There is a potential to increase farm yields to reduce costs for farmers and to reduce the

price of sugarcane as a raw material [ CITATION Sha18 \l 1033 ].

 Government can take steps to improve quality of production and efficiency of processes

such as premium for those farmers who produce high quality sugarcane and incentives

for those millers who make optimal use of by-products to minimize the production costs [

CITATION Daw18 \l 1033 ].

 There is a huge potential of diversification specifically for producing power if Baba Farid

Sugar Mills set up their own power plant because Pakistan is a power deficit country

[ CITATION Abb19 \l 1033 ].

7.3.4. Threats

 Production of sugar from beetroot is a major threat for the company as sugar beet serves

as the substitute for sugar [ CITATION Daw13 \l 1033 ].

 High inflation rates and high borrowing rates can badly affect the company’s financial

position [ CITATION Sha18 \l 1033 ].

28
  Expected shortage of water in future due to growing population in Pakistan can diminish

the growth of the company as sugar mills require ample amount of water for cultivation

[ CITATION The183 \l 1033 ].

 Natural disasters and pest attacks are always a threat for the mills [ CITATION Hus18 \l 1033

].

 Political instability is a threat because the overall sugar industry is controlled by

politicians and frequent change of governments and poor law and order situation means

lack of attention towards the company [ CITATION Daw17 \l 1033 ].

 Devaluation of currency is another threat for the company because it increases the cost of

capital as well as the production costs [ CITATION Abb19 \l 1033 ].

8. CONCLUSION

Based on the detailed financial and strategic analysis of Baba Farid Sugar Mills Limited,

different conclusions can be drawn about the company. The financial performance of the

company is deteriorating year by year especially in 2018 (with the exception of 2017).

Moreover, the company’s liquidity position has worsened due to poor working capital

management. The company’s financial leverage has increased over time due to greater reliance

on debt financing for operations. Cash cycles are negative mainly due to greater number of

average payment days. It takes too long for the company to pay its liabilities, however its

average collection period is less indicating quick receivables collection. Most importantly, the

company’s EPS is very low over the years as well as its price to earnings ratio. This indicates

that company has low value in the eyes of investors and very poor financial health.

29
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