Bajaj Hindusthan Ltd and EID Parry (India) Ltd, the country’s two major sugar firms, reported results last week, providing a glimpse on how the sector is faring.
Sugar shares have fallen out of favour with investors, as domestic prices remain subdued, despite international rates rising. Higher domestic output and the government’s determination to keep prices under check are the main reasons for this. Still, the first flush of results reveal that sugar mills may yet end the current sugar season (October 2010-September 2011) on a brighter note.
Also see | Sweet Results (PDF)
Bajaj Hindusthan’s sales in the March quarter nearly doubled to Rs 1,262 crore compared with the year-ago period. It was no surprise because its December quarter sales had risen by 2.4 times to Rs 1,476 crore. What will please investors is that operating profit margin rose by about 2.5 percentage points, compared with the year-ago period. In the December quarter, margins had fallen.
EID Parry’s sales have risen by a more modest 11%, but margins have fallen, owing to its farm inputs division. A segmental analysis shows that EID Parry’s farm inputs division’s sales fell by 15% and profit by 30%. But its sugar sales doubled and profit rose by 76%.
EID Parry’s sugar output during the quarter doubled, but part of this growth is due to acquisitions. Bajaj Hindusthan has not disclosed its quantitative numbers. The more important aspect is the improvement in profitability, despite sugar prices not rising by much.
One reason for better profitability is that higher cane output has rationalised the prices paid, compared with the high cane prices paid in the previous season. Also, companies were sitting on high-priced inventory, which was affecting profits, as sugar prices fell from its peak levels; but this inventory was completely sold in the December quarter.
The government, too, helped by paying sugar companies 10% more for levy sugar bought for the public distribution system, and halved the quantum of levy sugar. That left more for open market sale, which gets better prices.
Higher cane crushing also means more byproducts. Co-generation of power, by burning byproduct bagasse, yielded more revenues and profits in the quarter under review. A similar trend was seen in the distillery division’s performance, which use molasses as an input.
The government’s decision to hike the procurement price for ethanol would have also contributed to better profitability. Bajaj Hindusthan’s power and distillery divisions contributed about 60% to segment profits.
Byproducts will be key to profitability, as sugar prices are unlikely to move up significantly, unless the government frees exports, or sugar production falls short of estimates.
India’s sugar output is expected to be about 24.5 million tonnes in the current season, 29% higher than the previous season’s output. Stable sugar prices will cap investor expectations, but higher output appears to be boosting performance.
Having burnt fingers on sugar stocks only last year, investors are right to be wary. The March quarter results indicate sugar companies are not as worse off as their valuations indicate. If they can sustain their performance for a quarter or more, investors may be willing to give them a second chance.
Graphic by Sandeep Bhatnagar/Mint
We welcome your comments at firstname.lastname@example.org