BackBy-products to drive sugar mill profitability
By-products to drive sugar mill profitability
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The government’s determination to keep a lid on inflation has meant that runaway international sugar prices do not feed into local market prices. Still, against the losses they suffered in fiscal 2011 (year ended September), sugar firms are expected to do better.
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Balrampur Chini Mills Ltd and Bajaj Hindusthan Ltdrecently declared their results; both are large sugar firms with mills in Uttar Pradesh, which produces nearly one-fourth of India’s sugar output. In a conference call, Balrampur Chini’s managing director Vivek Saraogi said that by his calculations, final sugar output would be closer to about 24 million tonnes (mt). That is about 1.5 mt short of the industry estimate at the start of the season. By mid-March, a final figure will become available. The output is adequate to meet India’s requirement of about 23 mt, and the rest could be exported at remunerative prices. But the government will allow exports only if it does not cause a spike in domestic prices.
In the December quarter, firms had high-cost sugar stocks carried over from the previous season. Fresh stocks have started coming in from the current crushing season, which began in October. While mills in Uttar Pradesh had paid up to Rs260-270 per quintal in the previous season, Balrampur’s average cane cost was about Rs216 per quintal in the December quarter. Since cane availability is higher in the new season, sales volume will be higher, but realizations are lower, with sugar prices in the December quarter about 15% lower against the year-ago period.
Balrampur’s sugar sales rose by 17% to 150,000 tonnes in the December quarter, against the year-ago period, but realizations were down by about 10%. Segment profit, therefore, fell by 71%.
Bajaj Hindusthan’s figures include the contribution of a subsidiary that was merged with the firm. That and sizeable carry-over sugar stocks, led to its sales more than doubling to Rs1,394 crore. But lower realizations meant that segment profit fell by 12%.
Sugar prices at about Rs29 per kg in the Mumbai wholesale market are nearly flat, against end-December. After March, when crushing will finally end, prices are expected to firm up a bit. But more clarity will emerge after the final production figure is known. The government’s stance will also play a part.
Balrampur’s closing sugar inventory is valued at Rs28.70 per kg (at the profit before tax level). Sugar prices have to go up further for the company to make profits. Where it and other sugar firms are making up is from higher volume of by-products (they are simply crushing more cane). By-products of this process, molasses, alcohol (including ethanol), and co-generation of power will all see higher volumes against last year, boosting profitability. Bajaj Hindusthan’s profits grew chiefly because of these by-products while Balrampur expects them to contribute in future quarters.
Thus, the outlook for sugar firms appears better against last year, but unless sugar prices rise significantly from their current levels, at least by about 10-15%, their profitability will be under pressure in fiscal 2012.
Graphics by Yogesh Kumar/Mint
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