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Table of Contents

COMPANY OVERVIEW..........................................................................................................................2
SHAREHOLDING....................................................................................................................................2
INDUSTRY OVERVIEW...........................................................................................................................2
COMPANY FINANCIAL PERFORMANCE.................................................................................................2
COMPANY RATIOS ANALYSIS................................................................................................................3
TRENDS ANALYSIS.................................................................................................................................4
REGRESSION RESULTS...........................................................................................................................4
COMPANY AUDITORS...........................................................................................................................5
REGULATORS.........................................................................................................................................5
SIGNIFICANT POLICIES..........................................................................................................................5
NON CURRENT ASSETS......................................................................................................................5
CURRENT ASSETS..............................................................................................................................5
COSO FRAMEWORK..............................................................................................................................5
CONTROL ENVIRONMENT.................................................................................................................6
RISK ASSESSMENT.............................................................................................................................6
Firm Specific:.................................................................................................................................6
Industry Specific:...........................................................................................................................6
CONTROL ACTIVITIES........................................................................................................................6
INFORMATION AND COMMUNICATION..........................................................................................7
MONITORING....................................................................................................................................7
CONCLUSION.........................................................................................................................................7

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BABA FARID SUGAR MILLS LIMITED

COMPANY OVERVIEW
Baba Farid Sugar Mills Limited is the group’s second sugar mill and is located in Okara. Set up in
1978, the Mill is named after the well-known Sufi of Pakpattan Baba Farid Shakarganj Rehmatullah
Alleh). It is principally engaged in the manufacturing and sale of sugar including it’s by product i.e.
molasses and V.Filter cake. The registered office of the company is situated at Suite – T-09,3 rd Floor,
Hafeez Centre, Main Boulevard, Gulberg III, Lahore and its manufacturing facilties are located in the
district Okara, Punjab. .Baba Farid Sugar Mills has been continuously striving to maximize the
potential of sugarcane and this focused and continuous effort has resulted in Baba Farid becoming
one of Pakistan’s leading integrated sugarcane processing companies The net annual production
capacity of the mill is 27,200 tonnes..

SHAREHOLDING
It shares are quoted on the Karachi, Lahore and Islamabad Chamber of Commerce and Industry and
Pakistan Sugar Mills Association. Baba Farid Sugar Mills has approximately 10% family ownership of
shares. The company has floated its shares on the stock market and most of the ownership belongs
to associated companies, undertakings and related parties. The total market capitalization as per
2017 data was Rs. 378 million.

INDUSTRY OVERVIEW
Sugarcane is one of the most important cash crops of Pakistan; it is a key input for sugar production
as well as the paper and board industry. Absence of major substitutes for sugar makes its demand
inelastic. Total sugarcane production in FY17 amounted to 75.5m MeT (FY16: 65.5m MeT) whereas
for FY18, 78.4m MeT has been forecasted. On a provincial basis, highest sugarcane production was
contributed by Punjab followed by Sindh and KP during FY17.
A total of 89 sugar mills are presently operating in the country. Out of 89 sugar mills, 45 are located
in Punjab, 38 mills in Sindh and remaining mills are located in KP. About 40% (36 sugar mills) in
Pakistan are listed on Pakistan Stock Exchange (PSX). During FY17, total sugarcane crushed
amounted to 70.9m MeT (FY16: 50.0m MeT) while sugar production was reported at 7.0m MeT
(FY16: 5.1m MeT), indicating a recovery rate of about 9.8% (FY16: 10.2%).
Government actively controls the support prices of sugarcane. Over the past four years, sugarcane
prices have remained stable and increased slightly by Cumulative Average Growth Rate (CAGR) of
1.4% whereas, the sugar average retail price has shown improvement and increased by CAGR of
3.8%. The steady rise in sugarcane procurement prices has made it difficult for mills to profitably
produce sugar, but the industry is currently protected by a 40 percent import tariff designed to
boost domestic sugar sector and protect the local industry from imports. Molasses and ethyl alcohol
are the two major by-products of sugar that are also exported. Over the past two years, Ethyl
Alcohol (Ethanol) exports have been of higher value than sugar exports. There has been no or very
little import in the sugar market.
Government subsidy for export of sugar for local companies has helped companies to reduce
inventory levels at the beginning of crushing season, thereby, avoiding a significant downturn.

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COMPANY FINANCIAL PERFORMANCE

Revenues of the Sugar industry in Pakistan are highly dependent on Sugar production and sugar
prices. In 2012, high sugarcane prices were fixed by Punjab government while the sugar prices
declined due to the high supply of sugar in market. This led to decrease in sales revenue by 7.85%
and company suffered losses. In 2013 sugar prices increased and high sales revenue led to a gross
profit of RS 86.07. Loss before tax also decreased to RS 135.5 M. Sugar recovery rate increased in
2014 by 9.60% due to favourable weather, availability of water and soil conditions. Sugar production
was in excess which allowed exports and made the company shift from operating losses to operating
profits. 2015 faced a financial downfall because sugar prices declined in international market. Sales
revenue decreased and low sale price led to the net loss of RS. 198.71 M with the loss per share of
RS 21.03 During 2016, the company's financial results changed to positive and profit before tax
increased to RS 3.2 from RS 204.86M last year. As per 2017, the yield of sugarcane was very low
compared to actual yield due to post-harvest losses. Majority growers were not following modern
practices and there was improper handling, harvesting, and inadequate transport facilities. To
counter this, management appointed new strategies and techniques. As a result, sales revenue
increased by 58.85%. The gross profit also rose by 39.92%. The company earned Profit before tax
with 640% increase and Profit after tax grew by 136.51%. However, as compared to overall industry,
the company’s overall net profit margin in 2017 is lesser than the rest of the companies in sugar
sector of Pakistan.

COMPANY RATIOS ANALYSIS

The Net Profit Margin of Baba Farid Sugar Mills has improved over the last 5 years from a negative
net profit margin to a positive net profit margin. However, Net Profit Margin of 1.53 %( 2017) is
lower than the competitor's net profit margin and the industry average as well. This means that the
company needs to control its cost of sales, operating, administrative and distribution expenses to
match to survive in the industry.

Debt to equity ratio was the highest in 2015 which shows that creditors supplied all the financing. It
improved in the upcoming years and settled at 4.02 in 2017. The company is stabilizing by reducing
its liabilities. However, it still exceeds the industry average of 1.72 which means that the company
still needs to work on decreasing its liabilities.

The company has the highest inventory turnover ratio in 2013 after which it is reduced to 3.8 in
2017. It is worsening because the cost of sales is decreasing and stock in trade available for sale is
increasing. It suggests the company is holding excess inventory which is unproductive. Due to lower
selling price, company has delayed selling of inventory, thereby, resulting in higher short-term
borrowings for longer periods. This resulted in higher leverage levels as well as finance cost.
Profitability and resulting cash flows were considerably lower due to lower margins and higher
finance cost as explained above. However, another possible reason for excess inventory could be to

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have a backup and avoid shortage during natural disasters. Trend analysis for sugar retail price is
presented below:

The company has a positive price earnings ratio in 2017 meaning investors are anticipating higher
growth in the future as the company has shown drastic improvement over the last 5 years. Also, it
exceeds the industry average which is in negative. Although company earned profit in three years
but directors of the company did not recommended dividends due to losses from previous years.
Due to this company’s Dividend Pay-out ratio remained zero over the last six years. It aligns with
industry practices where some of the competitors are also not paying dividends.

TRENDS ANALYSIS

2015 witnessed a huge and abnormal


Admin, Selling & Distribution expenses increase in administration, selling and
60.00% distribution expenses. A large portion of
50.00% expenses was allocated to cost of sugarcane
consumed. Total sugarcane production
40.00% declined to 63.2m tons. The decline was
30.00% largely due to reduced cultivated area and
flood damages during the year in Northern
20.00% zone. Decreased sugarcane supply can be the
10.00% reason for high sugarcane prise leading to
increase in cost of sugarcane consumed. Over
0.00%
2013 2014 2015 2016 2017 the past four years, sugarcane prices
increased by CAGR of 7.5% according to JCR.

REGRESSION RESULTS
The regression results for Baba Farid Sugar Mills show that Net Profit is not a good predictor of Share
Price. Adjusted R square has an approximate value of 0.003 which means that there are some other
significant factors which impact the share price.

COMPANY MANAGEMENT

The company initially had 7 board of directors in 2012. Mr Muhammad Aslam and Mr Husnain Asad
Aslam, directors of the company resigned and the board appointed Mr Shah Mahmood Qureshi and
Mr Qaisar Abbas Naqvi as Director. Muhammad Sarwar was appointed as the Chief Executive Officer
of the company in 2012 and also served as a member of the board of directors. Two females are part
of the panel of the board of directors. After 2015, distinctions were made among the board of
directors. The present panel consists of 1 independent director, 3 executive directors including the
CEO and the chairperson, 3 nonexecutive directors, and one independent director. The board is
directly accountable to the shareholders and each year the company holds an annual general
meeting (AGM) at which the directors provide a report to shareholders on the performance of the
company, its future plans and strategies are and also submit themselves for re-election to the board.

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The company consisted of Audit committee, headed by Mirza Maqsood ul Hasan. Muhammad Ashraf
replaced Mirza Maqsood in 2016 as the chairperson of audit committee. The committee assisted
the board of directors fulfil its corporate governance and overseeing responsibilities in relation to an
entity's financial reporting, internal control system, risk management system and internal and
external audit functions. This was later followed by the formation of Human Resource and
Remuneration Committee, headed by Naheed Rohi, in 2015.

COMPANY AUDITORS
Shaikh & Chaudhry Chartered Accountants have been handed the external audit function to assess
the financial statements of the company, investigate whether accounting standards were being
followed or not and check accounts maintained for every transaction. In their reports they have
been declaring that according to their study of financial statements, the statements are free from
any material misstatement. The company has been maintaining proper books of accounting and any
investments or expenses incurred were solely for business purpose. The firm performed the audit
for the company till the end of September 2015 and eventually retired. The Board of Directors
recommended Hasnain Ali & Co Chartered Accountants for the next financial year audit in the
Annual General Meeting.

REGULATORS
Sugar industry is regulated by Pakistan Sugar Mills Association (PSMA). It was established with its
objectives set out in the Memorandum of Association and it continues to be the representative of all
sugar mills across Pakistan. Some of the key functions include:
 Attaining efficiency in the best interest of the sugar mills and sugar allied industries within
the parameters of Government of Pakistan policies.
 Bring efficiency in irrigation system and adoption of new technologies in farming system
 Pursuance of comprehensive policy which covers production, price and achieve market
stability.
 To create institutional structure for research and development of sugar
 Maintain valuable data information for the production, sale or stock beside forecasting
yearly production to help millers and policy makers at government level.

SIGNIFICANT POLICIES
NON CURRENT ASSETS
The company applies reducing Balance method to depreciate its assets. Assets are reported
at historic cost minus accumulated depreciation. The reducing balance rate for assets is
determined by market forces. Maintenance expense relating to non-current assets is
charged to profit and loss account.
CURRENT ASSETS
Revenue is recognized once the title of sugar purchased, along with risk and rewards, is
transferred to the buyer whether the sugar is still in the warehouse of the company. The
major revenue to the company comes from the sale of sugar locally while the sugar exports
also add to the revenue occasionally.

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COSO FRAMEWORK

CONTROL ENVIRONMENT
The control environment comprises the integrity and ethical values of the organization, the
parameters enabling the board of directors to carry out its governance oversight responsibilities, the
organizational structure and assignment of authority and responsibility. Company’s control
environment has showed an improvement over the last five years. The company set up HR
committee in 2015 to ensure accountability of executive directors and for the achievement of
mission and goals. Also, audit committee is present and meetings are held at least one in a quarter.
Directors of the company are tax payers which means they are restricted from unethical practices.
Although recently the company’s name was present among those who were accused for not
purchasing sugar at fixed price. This was unethical practice towards the farmers and company had to
face crackdown.

RISK ASSESSMENT

Firm Specific:
The company's activities expose it to a variety of financial risk, market risk (including currency, price
and interest rate risk), credit risk and liquidity risk. The company's overall management programme
focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects.
The company experienced currency risk in 2015 and 2016 when it was exporting sugar due to excess
production. It may arise in future as well if the company decides to keep foreign debtors.
The company is exposed to price risk because of investments in ordinary shares of listed companies.
To manage price risk arising from investments the company has Investment committee where they
diversify its portfolio and also monitor developments in equity markets. The company does not
account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore,
it is not exposed to interest rate risk.
The company is exposed to credit exposure due to trade debts and its balances. Company's
Receivable turnover has increased to 16.79 from 12.19 in 2017. It has debts due from the last 365
days. The risk is them discharging these obligations is high. To counter this company must revise its
credit limits credit agency report and bank report. It should also develop a standard process for
dealing with overdue accounts of more than 90 days.
The company is exposed to liquidity risk as the current ratio in 2017 was 0.54. This signifies that the
company does not have enough assets to convert in cash to meet immediate obligations.

Industry Specific:
Sugar mills are subjected to the industry-specific hazards. The inherent risk in the company can
include energy and electricity, hazardous manual tasks, fire explosion, chemical spills or natural
disasters. Company operators should ensure that appropriate, adequate and effective response
procedures are planners, distributed, understood and rehearsed to deal with such emergencies.
Also, in case of natural disasters such as flood the company may have a shortage so company should
keep sugar raw materials in inventory as a back up

CONTROL ACTIVITIES
The company has implemented segregation of duties to avoid internal control problems and ensure
efficiency. The CEO is not the chairperson of the board of directors. And chairpersons of audit and
HR committee are separate and restricted to their committees. All the powers of the board have
been duly exercised and decisions on material transactions have been taken by shareholders/boards.
Financial statements of the company were endorsed by the CFO and CEO before approval of the

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board to prevent biasness and implement authority. Company also maintained register of persons
having access to inside information and maintained record including basis for inclusion or exclusion
from the list.

INFORMATION AND COMMUNICATION


All the financial statements of the company have been prepared by approved accounting standards
as per applicable in Pakistan. Proper disclosures have been made as per the requirements of the
Company Law.

MONITORING
Board meetings were conducted once in a quarter by the company to monitor and evaluate the
performance of the company including the evaluation of the strategies made in prior periods. Any
errors in the systems were identified and remedial measures were taken. Meetings were planned
out and presided by the chairman. In his absences, they were conducted by a director elected by a
board for this purpose.

CONCLUSION
Baba Farid Sugar Mills has been continuously striving to maximize the potential of sugarcane
and this focused and continuous effort has resulted in Baba Farid becoming one of
Pakistan’s leading integrated sugarcane processing companies. However, the company still
has tough competition in the market and therefore they should diversify its sugar business.
This can be done by introducing power plan run by residues of sugar cane such as bagasse.
Company can also enter in foreign exchange transaction of the by-products of sugar to
increase profitability and reduce dependence on sugar sales.