Sugar industry: High prices and higher bottomlines

New Delhi: As the Indian equity markets are scaling new highs, stocks across the sectors are buzzing and trading at their historical high. Indian sugar industry has shown double-digit sales growth and thus accelerated the stock prices to touch new highs. The share prices of some of the sugar majors namely Bajaj Hindustan, Balrampur Chini and Dhampur Sugar have gone up by 140%, 144% and 134% in the last one year to trade at Rs 345, Rs 131 and Rs 230, respectively.

Says, CS Nopany, president ISMA, "Demand-supply scenario in the next few years is likely to be evenly balanced. In any case, surpluses can be easily exported at reasonable prices".

Though the sugar industry is perceived to be cyclical in nature the changing sugar dynamics in the global and domestic markets has augured well for the industry. Driven by higher demand and better realisation, results of some of the sugar companies for the year ended September 2005 have shown a robust sales growth. Net sales of companies such as Shree Renuka Sugar, Bajaj Hindustan and Dhampur Sugar have grown by 182%, 68.20% and 54%, respectively. However, Dwarikesh Sugar and Mawana Sugars remained slow with the sales growth of 8.23% and negative 3.52% respectively. The buoyant demand and relatively slower growth in the supply coupled with the declining inventory has propelled higher sugar prices globally as well as in the domestic market. Higher sugar prices have helped the companies to show better operating margins, which in turn reflected in the significant PAT growth.

The operating profit margins (OPM) of Bajaj Hindustan and Dwarikesh Sugar have expended significantly to 25% and 29.85% respectively. Over all the net profits have grown in three digits, with the highest growth shown by Dhampur Sugar and Mawana Sugar by 483% and 338% at Rs 55.68 crore and 60.84 crore respectively. More importantly, industry has generated one of the highest RoNW, with the Dhampur Sugar and Dwarikesh Sugar being high at 54% and 41.98% respectively.

According to an industry analyst, "The sugar prices are expected to remain firm in the next couple of years given the tight demand-supply scenario." The Indian companies are gearing up with the additional capacities coming in, to take advantage of high demand, by 2007 Bajaj Hindustan will be operating with capacity of 1,00,000 TCD (tonne crushed per day) as compared to current 57,000 TCD. However, positive factors like allowing futures trading in the sugar, growing ethanol blending and higher revenue visibility from by products will have a positive impact to sustain future growth.

JITENDRA KUMAR GUPTA
Financial Express
January, 22, 2006