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JSTIL needs more investments

JSTIL needs more investments
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First Published: Wed, Mar 31 2010. 12 13 AM IST

Updated: Wed, Mar 31 2010. 12 13 AM IST
Tea and sugar combine to make a good brew. Jay Shree Tea and Industries Ltd (JSTIL) seems to think they make a good combination in business too. The Rs400 crore firm, which gets three-fourths of its revenue from selling tea, is acquiring MP Sugar Mills Ltd for Rs112 crore. The Bihar-based company has a cane crushing capacity of 4,600 tonnes crushed per day (tcd), a 6MW co-generation power plant and a 1,000-acre sugar cane plantation.
JSTIL claims its experience in running agro-based industries like tea and fertilizers gives it the capability to run a sugar business as well. But there are differences in business fundamentals. Tea is a cyclical business and market conditions play a key role in determining how the business performs. In the case of sugar, government interference can affect market dynamics. This is a key risk in the business, similar to what the company faces in its fertilizer business. JSTIL has chosen Bihar to enter the business, pinning hopes on the changed business environment in the state and the government’s focus on reviving the sugar industry.
Graphic: Yogesh Kumar/Mint
JSTIL’s long-term strategy for the business will determine the significance of this acquisition. It could either operate this business at current levels or decide to move towards an integrated sugar operation, combining sugar, power co-generation and production of alcohol or ethanol. It will also have to add capacity to become a bigger firm. Scale and by-products play a key role in enhancing the profitability of the business.
According to the company, the acquisition price is on the lower side?at Rs2,150 per tonne of crushing capacity (based on average 112-day crushing season), compared with the industry standard of Rs2,500-3,000 per tonne. Valuations of sugar mills based in Uttar Pradesh are much higher. But this could be for larger capacities, integrated operations and better recovery rates in Uttar Pradesh. Based on its average crushing season estimate, annual sales from the plant could be around Rs150 crore, assuming an average sugar price of Rs35 per kg. That will be a sizeable addition to JSTIL’s revenue, though its impact on profit may vary depending on the cost structure of the plant.
JSTIL plans to fund the acquisition through internal accruals and debt which should not be difficult, considering its tea business has had two good years. But the real test will be how it manages to fund the high working capital needs of the sugar business and also fund expansion of the sugar business. News of the acquisition hit the street in mid-March and since then the stock has fallen by 10%, implying that the markets are concerned about the integration. Meanwhile, shares of other tea stocks such as McLeod Russel India Ltd and Harrisons Malayalam Ltd have risen by 10-11%.
Write to us at marktomarket@livemint.com
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First Published: Wed, Mar 31 2010. 12 13 AM IST