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News
Mills look to sweeter days
Date:
06 Jun 2016
Source:
Financial Chronicle
Reporter:
Prabhudatta Mishra
News ID:
5649
Pdf:
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The sweetener's rising price, which could cross Rs 50 per kg, has also reflected in the share prices of sugar mills
Bajaj Hindusthan, the largest private sugar producer in the country, came under fire from sugarcane growers in Uttar Pradesh for not clearing farmers’ dues. Several other mills are also yet to clear the dues even as crushing ended by the end of April.
While most sugar companies did not have working capital loans at the beginning of the season, the government’s export-linked production subsidy of Rs 4.50 a quintal helped them clear farmers’ dues. The subsidy has since been withdrawn after sugar prices in the domestic market increased.
But cane dues are much lower than last year’s. For the 2015-16 sugar season (October-September), arrears are at Rs 9,361 crore compared with Rs 22,000 crore last year. Of this, UP accounts for Rs 2,855 crore. The state has allowed payment of cane price in two stages. Until the end of June, mills are expected to pay cane dues based on the fair and remunerative price (FRP) of Rs 230 a quintal, according to which arrears of Rs 2,855 crore has been estimated.
But July onwards mills in UP will have to pay dues based on the state advised price (SAP) of Rs 280 per quintal, which will increase dues to Rs 5,795 crore. The state government will partly subsidise dues.
It is mandated that farmers be remunerated in accordance with FRP and sugar recoveries within a period of 14 days, failing which interest is payable by mills. The sugar factories will also have to pay the higher price than the FRP, in case any state government sets such a rate. At the current rate of FRP, mills are estimated to pay about Rs 65,000 crore to cane farmers in the entire 2015-16 season.
Maharashtra, dominated by cooperative sugar mills, follows a different model where factories enter into an agreement with farmers on the cane price payable to them. But it cannot be lower than the FRP.
The situation this time looks bright compared with last year’s, as sugar prices have risen to more than Rs 40 per kg in the retail market. Consumers were happy to buy sugar at Rs 30 per kg last year when mills were losing money by failing to cover even the cost of production.
The rising commodity prices have also reflected in the share prices of sugar mills. Share prices of leading sugar mills have more than doubled since October 1, 2015, when the season started. Dhampur Sugar rose 209.38 per cent, Mawana Sugar 605.80 per cent, Sakthi Sugars 133.11 per cent, Shree Renuka Sugars 95.14 per cent, Balrampur Chini Mills 115.36 per cent and Bajaj Hindusthan 40.36 per cent between October 1, 2015 and June 3, this year.
Share prices of all these companies, except Balrampur, had declined during the 2014-15 season, precisely between October 1, 2014 and September 30, 2015. Shree Renuka declined 55.14 per cent while Dhampur dropped by 38.33 per cent.
Afshan Sayyad, an analyst with Dolat Capital Market, had predicted the sugar cycle reversal in March this year and the acceleration in prices. In the 2008-09 season, when consumption declined, the sugar prices rallied by 70 per cent, he said in a report. He has recommended ‘buy’ for Triveni Engineering & Industries and Balrampur Chini Mills.
Triveni Engineering, an integrated sugar player, is the third largest in the country having a cane crushing capacity of 61,000 tonne per day, ethanol capacity at 160 kl per day and power generation capacity of 68 mw. Triveni is among the few sugar mills that performed better in the market in the last sugar season. It rose by 24.58 per cent between October 1, 2014 and September 30, 2015.
Balrampur Chini Mills also bucked the trend and grew 5.5 per cent between October 1, 2014 and September 30, 2015. Balrampur Chini is the second largest sugar producer with 76,500 tonne of cane per day (TCD) capacity from all the 10 mills located in UP.
Bajaj Hindusthan is on a ‘bottom triangle’ chart pattern, according to Recognia of the US, which has developed the technology for chart pattern recognition and automated interpretation based on the standards of technical analysis. Bottom triangle is a bullish signal that indicated that prices might rise to Rs 25.25-26.50 over 43 days, it said on May 11. The share price closed at Rs 19.70 last Friday.
Shree Renuka Sugars, India’s largest refiner, is considering granting an option to its lenders to convert a part of loans granted into equity shares up to 10 per cent of the present equity share capital, the company said in a filing to stock exchanges last month. It may allot a maximum of 9.28 crore equity shares, which is equivalent to 10 per cent of the present equity share capital, at a price of Rs 16.56 per equity share or the price as per the regulations prescribed by Securities and Exchange Board of India (Sebi), whichever is higher, the company said. The total consolidated debt of the company was Rs 8,896.72 crore as of March 31, 2015.
Meanwhile, the country’s sugar production has dropped this year and may fall by 4 million tonne next season. The opening stock next year will also be lower. All these suggest that sugar companies could bounce back after three years of losses. Due to lower planting of sugarcane in drought-affected Maharashtra and Karnataka, production may not exceed 21 million tonne in 2016-17.
According to Indian sugar mills’ association (Isma) data, the country is estimated to produce 25.1 million tonne sweetener in the 2015-16 season (October-September) compared with 28.3 million tonne in 2014-15.
Mills know that prices will go up henceforth as the market always reacts to the demand-supply situation. The sugar futures also indicate a positive trend. Only thing that would dent the mills’ kitty could be any government decision to allow large-scale imports. As the Narendra Modi government is trying to build up a pro-farmer image, it may not open up imports completely.
The import of sugar is regulated through duties. Whenever the government feels there is a chance of foreign supplies coming into India, it raises the tax. Currently, the sugar import duty is 40 per cent and food minister Ram Vilas Paswan on May 21 said the government would lower the duty if local prices go up.
The posturing by the minister had an effect on the mills, as they decided to continue production at the current level. But when the festival demand will come in October, mills will be happy to go with the market trend without bothering about the government warning.
Isma, the industry body of private sugar mills, has said there would be enough sugar available next year. By its estimates, the country will have 7 million tonne of sugar when the season opens on October 1, and a small drop in production will not be a concern.
But one thing is clear, there will be lower production of sugar next year because farmers have planted less sugarcane. The output will be lower than consumption.
In the 2015-16 sugar season, though the output was lower than a year earlier it was almost at the same level as consumption. The opening stock was even higher at about 9.1 million tonne. With all these comfort statistics, the government could not stop prices from going up to Rs 45 per kg. All through these months, since October 2015, the government policy was to raise sugar prices so that mills could pay dues to farmers.
In 2016-17, the output will see a drastic reduction, the opening stock will also be lower than what it was in the corresponding period of the previous year. In such a scenario, the sugar price may cross Rs 50 per kg, unless the government armtwists millers to artificially keep it at a certain level.
prabhudatta.m@mydigitalfc.com
1) Company review:
Bajaj HindustHan Sugar
Business & background:
Bajaj Hindusthan Sugar is India’s largest sugar manufacturer. It has 14 sugar mills with cane crushing capacity of 136,000 tonne per day and alcohol distillation capacity of 800 kl per day.
Prospects:
In the latest quarter of March 2016, Bajaj Hindusthan’s standalone revenue increased to Rs 1,619 crore, which was 37 per cent higher against the year-ago quarter, making it the best quarter in FY16 as far as net sales growth was concerned. It was also the second-best performance in 16 quarters. The company’s standalone adjusted net profit was Rs 126 crore, which was an all-time high. Previous two quarters had seen the company report net loss of Rs 67 crore (Q3) and Rs 280 crore (Q2), while the first quarter had seen a net profit of Rs 107 crore. The company’s operating profit in Q4 stood at Rs 343 crore.
Valuation:
At Friday’s close, the stock traded at 19.8 times the EPS for the past four quarters.
2) Company review:
Balrampur Chini Mills
Business & background:
Balrampur Chini Mills is one of the largest integrated sugar manufacturing companies in India. It also manufactures ethyl alcohol and ethanol.
Prospects:
The company reported better recoveries (+141 basis points YoY to 11.3 per cent) and sugar realisations (+19.7 per cent YoY to Rs 31.4 per kg). While the topline increased by 17.1 per cent YoY to Rs 7,70.6 crore, the company reported 3.5 times YoY surge in adjusted net profit to Rs 2,62.3 crore in Q4FY16. According to SPA Securities, the core sugar segment largely drove the improvement, as it reported a profit of Rs 157.1 crore at Ebitda level against the loss of Rs 13.3 crore in Q4FY15. “Expected lower sugar production, both globally and domestically, will result in firm sugar prices. Improving ethanol dynamics and robust balancesheet will aid profitability. We expect the topline and the bottomline to register a CAGR of 11.3 per cent and 18.8 per cent over FY16-18E, respectively,” it said.
Valuation:
At Friday’s close, the stock traded at 113.6 times the EPS for the past four quarters.
3) Company review:
Dhampur sugar mills
Business & background:
Dhampur Sugar Mills (Dhampur) is a leading integrated sugarcane processing company in India. It is also into renewable power, fuel ethanol, alcohol-based chemicals and bio-fertilisers.
Prospects:
The company’s financial performance for FY16 has shown revival on the back of higher recovery and notwithstanding lower realisation. In Q4FY16, its revenue increased by 30.4 per cent YoY to Rs 560 crore, while its net profit went up by 47.3 per cent to Rs 113.6 crore. According to a recent research report by Ashika Stock Broking, “The outlook is strong for the sugar industry considering global deficit and recovery in sugar prices. India also witnessed near-deficit scenario and thus the elevated domestic prices. Together with the increased government focus on the sector, the mills are witnessing improved financial performance.”
Valuation:
At Friday’s close, the stock traded at 96.9 times the EPS for the past four quarters.
4) Company review:
Shree Renuka Sugars
Business & background:
Shree Renuka Sugars is an integrated sweetener manufacturing company. It operates three facilities in Maharashtra and one in Karnataka.
Prospects:
The company recorded standalone net sales of Rs 1,818 crore in Q4FY16, which was 8 per cent higher than the year-ago quarter. It was the third-worst growth rate seen by the company in that financial year and the eight-worst in the last 16 quarters. Its standalone adjusted net profit was Rs 220 crore, which was an all-time high. This must have come as a relief for all the previous three quarters had seen the company log net losses – Rs 46 crore in Q3, Rs 233 crore in Q2 and Rs 227 crore in Q1 of FY16. In FY15, too, the same pattern was seen – net loss in first three quarters followed by a net profit in Q4.
Valuation:
At Friday’s close, the stock traded at 14.5 times the EPS for the past four quarters.
(Compiled by Rajesh Gajra & Shishir Parasher)
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