It was in January '04 when sugar prices moved up globally on news of a sharp decline in Indian sugar output. Since then, sugar prices have been going one way - up north. The upturn in the sugar cycle is more than two years old now.Going forward, sugar prices are expected to remain firm for at least a year or two. It bodes well for Indian sugar companies, particularly those based in Uttar Pradesh.
With fresh capacities being put up to take advantage of tax and other state incentives, top companies such as Bajaj Hindusthan, Balrampur Chini and Triveni Engineering are expected to benefit from the ongoing sugar boom. Why have sugar prices gone up? Blame it on global dynamics.
After remaining in surplus, the world sugar market faced a deficit in '04 and '05. That, in turn, put pressure on prices and reduced inventory to record low levels. Supply has also been reducing because of diversion by large sugar manufacturing countries like Brazil.
With a rise in crude oil prices, sugar juices are being increasingly diverted towards ethanol production than for producing sugar.
Again, China and India have been increasingly guzzling sugar products. So, while on the one hand, the sugar market faced supply shortage due to diversion and lesser production in countries such as India, it also faced demand pressure from some countries. Thus, domestic sugar players are now wellpoised to benefit from the global scenario.
EU and Brazil together contribute around 45% to the total world exports. Indian sugar companies are among the lowest cost producers and with EU deciding to reduce subsidy, domestic sugar players are expected to play a crucial role in meeting the global sugar demand.
Sugar companies have already benefited from higher sugar price realisations by showing bumper profits in recent quarters. Top players Bajaj Hindusthan, Balrampur Chini and Triveni Engineering managed to double profits in the latest ended financial year and profitability growth has been seen in the recent quarters also.
Part of the growth is coming with fresh or brownfield capacity additions, particularly in UP. The companies include Bajaj Hindusthan, Balrampur Chini, Triveni Engineering, Mawana Sugar and Dwarikesh Sugar. Out of the lot, Dwarikesh Sugar wouldn't qualify for the state incentives as it doesn't meet the minimum investment criteria.
Among the incentives that these companies would enjoy are 10% capital subsidy, remission of stamp duty and registration charges on land purchase and concession on transportation expenses, cane purchase tax.
The overall concession will be limited to the extent of new investments made and will be available for 10 years in case investments are above Rs 500 crore and for five years if investments are over Rs 350 crore. By end of FY07, market leader Bajaj Hindusthan is expected to operate with a capacity of 1,00,00 TCD (tonnes crushed per day) from current levels of 57,000 TCD. In terms of capacity addition, it is the highest among all players.
Balrampur Chini would operate with a capacity of 55,000 TCD by FY07 from current levels of 47,500 TCD. The latter is eagerly looking at more acquisitions and mulling further expansions. Triveni Engineering is looking at least at 40,500 TCD by '07.
While firmer sugar prices would directly improve the bottomline of most sugar firms, companies based in UP are expected to benefit more, thanks to policy incentives offered by UP and its proximity to bigger sugarcane markets. Share prices of many of the sugar companies have run up significantly - upwards of 40% in the last one month.
But then, with the higher growth expected in next two years, there is still lot of upside potential. Bajaj Hindusthan is quoting at a P/E of 27, while it is 16 for Balrampur Chini, 14 for Triveni Engg, 11 for Mawana Sugar and 14 for Dwarikesh Sugar.
With other income emanating increasingly from distillery and cogen operations, the profitability would grow at a much faster pace than sales for these companies. Tax incentives and volume growth are expected act as buffers if the sugar prices were to fall.
Some of the companies would also become debt free, thanks to increased cash flow. Sugar companies seem attractively priced at current levels and being a cyclical industry the risk-return givings are also much higher. However, sugarcane availability in the western UP region could impact capacity utilisation and profitability.
-Economic Times
January 9, 2006
