Sugar firms: Not so sweet-Although the govt’s move permitting export is positive, higher cane costs and a surplus situation in the country- 25/8/2011

Sugar firms: Not so sweet(THESE ALL TAKE US TOWARDS CORRUPTION,PHIR BHI DIL HAI HINDUSTANI...!!...VT)

Ujjval Jauhari / Mumbai August 25, 2011, 0:23 IST

Although the govt’s move permitting export is positive, higher cane costs and a surplus situation in the country mar the prospects of top producers.

Stocks of Shree Renuka, Balrampur Chini and Bajaj Hindusthan gained on the bourses recently, following the government’s decision to allow export of half a million tonnes of sugar, besides their results. However, the up-move did not last for long, which analysts reason is due to the subdued medium-term outlook for the sector. They say the government’s decision would help companies in the sector gain from higher export realisations, but overall profitability of a majority of companies will remain under pressure due to higher costs and a likely oversupply situation.


The decision allowing export of sugar, says Crisil, is likely to boost the September quarter’s operating margins of manufacturers by 450-550 basis points. For the sugar year (SY) 2011 (October 2010-September 2011), the margins are expected to rise by 150-550 points. The coming festival season should also provide some support to domestic sugar prices, which had moved up a bit recently. However, with pressure on inflation continuing, the government will also keep an eye on domestic sugar prices.

MIXED TREND

Rs crore Shree
Renuka Balrampur
Chini Bajaj
Hindusthan

Revenues 2,240.1 563.7 1,062.0
Y-o-Y chg (%) 12.0 4.6 45.9
Ebitda 432.4 361.8 224.5
Y-o-Y chg (%) 165.9 -42.2 156.1
Profits 187.0 -19.9 1.2
Y-o-Y chg (%) 107.7 -278.4 LTP
for year ending… SS11 FY12 SS11
EPS (Rs ) 6.9 3.6 2.9
PE (x) 8.3 15.0 18.0

The financial figures are for quarter ended June 2011; EPS is Consensus Estimates; EPS and PE are projections , LTP is loss to profit, SS: Sugar Season
Source- Bloomberg, Capitaline, Analyst reports

While the near-term prospects appear good, the medium-term demand-supply situation remains unfavourable for domestic producers, as the country is expected to see sugar output outpacing supply by two to four million tonnes (mt) in SY12. In SY11, the surplus is projected at 1.7 mt. Additionally, cane procurement prices are also seen moving north, keeping margins under check. For instance, the state administered price (SAP) of cane in UP was Rs 180-185 a quintal in SY10, but moved up to Rs 205 a qtl in SY11 and is expected at Rs 215-220 a qtl for SY12.

Among top sugar companies, Shree Renuka Sugar may still outperform its peers because of international business exposure. Turnaround in its Brazilian operations should drive profitability, reckon analysts. Peers Balrampur Chini and Bajaj Hindusthan, having manufacturing facilities in sugar belt of UP, are likely to feel the heat due to rising cane procurement prices. However, the sharp fall in their share price over the past 18-20 months suggest limited downside from current levels.

Shree Renuka Sugars, despite a mere 12 per cent year-on-year growth in revenues, saw profits more than double on the back of a surge in operating margins to 19.3 per cent, compared to 8.1 per cent in the June 2010 quarter. Margins improved primarily because of a boost from its Brazilian operations (sugar and ethanol businesses), reckon analysts. Rohit Sanghvi of Prime Broking observes better utilisation of Brazilian capacities and use of hedging strategies to protect the downside on sugar realisations would help its operations abroad to drive revenues and earnings. The stock, at Rs 57.40, trades at 8.2 times SY11 consensus earnings estimates, and Bloomberg data show all analysts have a buy rating on it.

Balrampur Chini, in the sugar segment, has seen a two per cent decline in sales, mainly due to flat volumes and 2.8 per cent fall in blended realisations of Rs 27.2 a kg. However, the segment reported a loss (Rs 17.3 crore) against a profit (Rs 19.5 crore) in the June 2010 quarter. Thus, operating profit margins declined sharply to 6.4 per cent compared to 11.6 per cent in the year-ago quarter, leading to a loss at the net level. Moving forward, analysts at Aditya Birla Money estimate some rise in sugar production during 2011-12 and 2012-13, and a marginal rise in blended realisations. However, the company’s distillery and power co-generation business, which did well in the June quarter, are expected to drive overall performance. Thus, analysts are recommending to accumulate the stock on dips, with a year’s perspective.

Bajaj Hindusthan, India’s largest sugar producer, saw strong growth of 45.9 per cent in revenue, led by a 38.7 per cent rise in sugar sales to Rs 974.6 crore, and more than doubling of distillery revenues (to Rs 86.9 crore), due to higher cane crushing. While the numbers are not strictly comparable, as they include the performance of Bajaj Hindusthan Sugar and Industries (merged with the company effective from October 2010), they are good. The combined entities’ operating margins, at 21.1 per cent, were also impressive, but interest expenses of Rs 141.8 crore curtailed Ebitda (earnings before interest, taxes, depreciation and amortisation), which along with higher depreciation charges capped profit growth.

Although the turnaround is positive, high debt of Rs 5,876 crore (as on March 2011) continues to be an overhang on the stock, impacting profits despite good operating performance for past three quarters. Until the company manages to reduce its debt meaningfully (planned through a rights offer), the stock will remain under pressure. Bloomberg Data says most analysts are neutral on the stock.