maverick
22-12-2007, 10:19 AM
The sugar sector has witnessed increased news flow with the recent announcements of government subsidies and the interim order of Allahabad HC. However, we believe, a better macro picture would emerge only after clarity in cane pricing in Uttar Pradesh for the 2007-08 season. Alternatively, south based companies like Shree Renuka Sugars, with an ethanol centric business model, look better placed in the current downturn.
Optimism on cane pricing but risks remain
Post the interim directive of the Allahabad HC, sugar mills have started crushing from end of November by paying cane price of Rs1,100/MT
HC has reserved its judgment on the directive for final cane price payable; key thing is UP government reserves right to set cane price, a right affirmed by the Supreme Court
Market feels UP based players may have to pay less in cane costs in the ongoing season on the back of the interim HC order thereby improving margins
However, final cane price for the current season is likely to be in the region of Rs1,150-1,200/ MT, according to our interaction with UP based players and marginally lower than Rs1,250/MT paid last year (although arrears of Rs14bn have built up)
Production may not be as per estimates but inventory overhang a concern
Due to late start to the crushing season, expectations are sugar production may be lower than initial estimates of 29-30mn tons which would support prices
Even then, assuming 27mn tons of output and 10mn tons of opening stock, next year inventories could reach about 15-16mn tons thereby suppressing sugar prices-these are expected to remain range bound over the next 6-8 months
Moreover, high carrying costs (Rs1.2/kg of sugar) and debt burden imply that interest costs would eat into any operational improvements on the sugar front
South based mills better placed on lower cane costs
As compared to UP, South based players like Renuka Sugars who pay SMP prices (about Rs900/MT) and have sizable ethanol revenues over the next few years would be a better play on the sector than UP based companies like Balrampur Chini, who would continue to face losses in sugar business
Triveni Engineering, although UP based, may also be better insulated due to its engineering business (which contributed nearly 90% of EBIT in FY07; and has current turbine order book of Rs5.4bn) and any value unlocking due to demerger
Most UP based players to incur losses in sugar business
Below we have attempted to model a typical UP based integrated sugar company’s per MT of cane and other conversion costs along with sugar and co-products revenue mix.
As can be seen, current landed costs of cane in Uttar Pradesh imply that most sugar companies would incur an operational loss or at least losses in the sugar segment
Operating profitability returns if cane costs decline below Rs1,200/MT or sugar realizations improve to about Rs14,500/MT
As compared to our estimates, actual operational losses are higher since some alcohol is sold as RS and ENA which fetches lower prices and some sugar is held in inventories
Apart from operating loss, industry also bears high inventory carrying costs (typically Rs1,200/MT of sugar in current scenario)
Cane Yields
Value
Comments
Sugar (Kg)
100
Represents products and their yields/MT of sugarcane Molasses (Kg)
50
Bagasse (Kg)
330
Ethanol (ltrs)
11
Saleable Power (units)
80
1MT of cane yields 33% bagasse which produces 148 units of power of which 80 units are saleable
Revenues (Rs)
Molasses
-
Since integrated plant so assumed no sale of molasses and bagasse Bagasse
-
Ethanol
237
Assumed realization of Rs21.5/litre Power
235
Assumed realization of Rs2.94/unit Total co-product revenues
472
Sugar revenues
1,350
Current sugar realization at Rs13.5/kg Total revenues (Rs)
1,822
Operating costs (Rs)
Cane Cost (1MT)
1,250
Landed cost of 1MT of cane Conversion cost to sugar
300
Ethanol conversion cost
149
Power conversion cost
185
Total operating costs (Rs)
1,884
Operating profit/(loss)
(62)
Most UP based sugar mills have shown operating loss due to higher cane costs
Source: India Infoline Research
The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/ advice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from any error in this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. This document is not for public distribution and should not be reproduced or redistributed without prior permission.
Optimism on cane pricing but risks remain
Post the interim directive of the Allahabad HC, sugar mills have started crushing from end of November by paying cane price of Rs1,100/MT
HC has reserved its judgment on the directive for final cane price payable; key thing is UP government reserves right to set cane price, a right affirmed by the Supreme Court
Market feels UP based players may have to pay less in cane costs in the ongoing season on the back of the interim HC order thereby improving margins
However, final cane price for the current season is likely to be in the region of Rs1,150-1,200/ MT, according to our interaction with UP based players and marginally lower than Rs1,250/MT paid last year (although arrears of Rs14bn have built up)
Production may not be as per estimates but inventory overhang a concern
Due to late start to the crushing season, expectations are sugar production may be lower than initial estimates of 29-30mn tons which would support prices
Even then, assuming 27mn tons of output and 10mn tons of opening stock, next year inventories could reach about 15-16mn tons thereby suppressing sugar prices-these are expected to remain range bound over the next 6-8 months
Moreover, high carrying costs (Rs1.2/kg of sugar) and debt burden imply that interest costs would eat into any operational improvements on the sugar front
South based mills better placed on lower cane costs
As compared to UP, South based players like Renuka Sugars who pay SMP prices (about Rs900/MT) and have sizable ethanol revenues over the next few years would be a better play on the sector than UP based companies like Balrampur Chini, who would continue to face losses in sugar business
Triveni Engineering, although UP based, may also be better insulated due to its engineering business (which contributed nearly 90% of EBIT in FY07; and has current turbine order book of Rs5.4bn) and any value unlocking due to demerger
Most UP based players to incur losses in sugar business
Below we have attempted to model a typical UP based integrated sugar company’s per MT of cane and other conversion costs along with sugar and co-products revenue mix.
As can be seen, current landed costs of cane in Uttar Pradesh imply that most sugar companies would incur an operational loss or at least losses in the sugar segment
Operating profitability returns if cane costs decline below Rs1,200/MT or sugar realizations improve to about Rs14,500/MT
As compared to our estimates, actual operational losses are higher since some alcohol is sold as RS and ENA which fetches lower prices and some sugar is held in inventories
Apart from operating loss, industry also bears high inventory carrying costs (typically Rs1,200/MT of sugar in current scenario)
Cane Yields
Value
Comments
Sugar (Kg)
100
Represents products and their yields/MT of sugarcane Molasses (Kg)
50
Bagasse (Kg)
330
Ethanol (ltrs)
11
Saleable Power (units)
80
1MT of cane yields 33% bagasse which produces 148 units of power of which 80 units are saleable
Revenues (Rs)
Molasses
-
Since integrated plant so assumed no sale of molasses and bagasse Bagasse
-
Ethanol
237
Assumed realization of Rs21.5/litre Power
235
Assumed realization of Rs2.94/unit Total co-product revenues
472
Sugar revenues
1,350
Current sugar realization at Rs13.5/kg Total revenues (Rs)
1,822
Operating costs (Rs)
Cane Cost (1MT)
1,250
Landed cost of 1MT of cane Conversion cost to sugar
300
Ethanol conversion cost
149
Power conversion cost
185
Total operating costs (Rs)
1,884
Operating profit/(loss)
(62)
Most UP based sugar mills have shown operating loss due to higher cane costs
Source: India Infoline Research
The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/ advice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from any error in this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. This document is not for public distribution and should not be reproduced or redistributed without prior permission.