Graphics: Sandeep Bhatnagar / Mint

By now, some clarity has emerged on both sugar and cane price trends. The crushing season has begun with UP sugar mills agreeing to pay farmers around Rs190 per quintal for sugar cane. During the fourth quarter, sugar realizations for BCML were about Rs26/kg and are at Rs31/kg at current levels. A shortfall in India’s cane production has seen a sharp rise in sugar prices. BCML expects these prices to be maintained during fiscal 2010.

In a conference call, BCML management indicated it expects the sugar cost to be about Rs25.50/kg at the profit before interest and tax level. This assumes a cane price of Rs190 per quintal. It also expects production to be higher in the current year, due to marginally better cane output and better sugar recovery rates. While BCML has about 85,000 tonnes of raw sugar that will be refined during the year, more will be contracted for refining after the crushing season ends. That is an indicator of better sales and profits in the current fiscal.

Like other sugar companies, BCML is trying to insulate itself from volatile cane production. It is increasing its sugar refining capacity, with a 500 tonnes per day (tpd) unit along with an existing 700-800 tpd unit. In years such as this, when cane production is low, it will refine imported raw sugar in these plants to meet sugar demand.

Two power plants which run on bagasse (a by-product) will be converted to run on coal too, to generate power even when bagasse is not available. Higher refining capacity and dual-fired power units will improve the contribution from both businesses. The total capital expenditure for these projects is estimated at around Rs30 crore.

While the outlook for sugar appears bright, the risks are from an unforeseen decline in sugar prices or adverse policy changes. BCML’s shares were down after its results, as lower revenue growth seems to have put off investors. Its shares trade at about 14 times fiscal 2009 earnings (year ended September) and about 10 times forward earnings for 2010. Thus, investors are already factoring in a sharp improvement in performance, as reflected in its valuation. The upside could come from a better-than- expected performance from its power and alcohol units or if sugar prices go even higher.

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