Sugar and spice...

Anup Menon

THE financial performance of the companies deriving a sizeable chunk of their revenues from sugar has been mixed.

The industry's leading players are Balrampur Chini Mills, Thiru Arooran Sugars and Dhampur Sugar Mills. These companies have large capacities and are likely to do well. Apart from the big players, the industry has numerous players with low capacities. The three sugar stocks amongst the actively traded stocks are Balrampur Chini Mills, Dhampur Sugars and Thiru Arooran Sugars.

Balrampur Chini Mills

The Balrampur Chini Mills (BCML) stock represents the best bet in the industry. The company's management is fairly good and the operations efficient. This is augurs well for the company's long-term prospects. Trading at around Rs 105, the stock discounts its latest annualised earnings per share around five times. Shareholders can stay invested and use any price declines to accumulate the stock.

BCML is among the largest players in the sugar sector. With the Tulsipur plant, the company now controls three mills with a total capacity of 20,500 tcd. The plants are located at Balrampur, Baban and Tulsipur -- in Uttar Pradesh's cane-growing region. This gives the company a strategic advantage in terms of production and marketing economies.

The company's performance should be seen in the light of a number of factors. The drop in earnings in the last fiscal is more on account of the industry's fundamentals. On the brighter side, BCML has consistently rewarded its shareholders through bonus issues and dividends. The company has also been consistently expanding capacities without raising equity. This should also be viewed favourably by equity investors.

Recently, the company's performance was affected by low sugar prices in the international market. This and the lower import duty tended to make imports cheaper than domestic sugar. Since sugar was under OGL, traders were allowed to import sugar on their own accord. This had a negative impact on the company's profitability.

However, the trends may change for the better. The Government has raised import duties to 60 per cent and international prices have firmed up. At the same time, the global supply has also been lower. Hence, the scope for imports is limited.

Apart from an improvement in the fundamentals of the industry, the high operational efficiency of BCML makes investing in the company attractive. In a capital-intensive industry, efficiency is crucial for survival.

The company's long-term strategies have also been fairly good. BCML adopted the acquisition route to increase sugar capacities. This makes a lot of sense as there a number of small and good plants that are not profitable because of the low capacities. A good example is Tulsipur Sugars, which was merged with Balrampur Chini with effect from 1999-2000. Further, investment in a greenfield project is also likely to be higher.

BMCL's performance for the first quarter of 2000-01 was impressive. Sales revenues rose 43 per cent to Rs 103 crore compared to the corresponding previous period. Operating margins improved from 19 per cent to 25 per cent. Post-tax earnings improved to Rs 10.21 crore (Rs 2.93 crore).

Given the broad improvement in the sugar industry and the company's operational efficiency, fresh investments can be considered at declines to the current market price.

Dhampur Sugars Mills

Another major player in the private sector is Dhampur Sugar Mills. The company's performance in the recent past has not been very impressive. It for instance, declared losses the last couple of years and the first quarter of the fiscal. The stock trades at around Rs 23. Shareholders can consider cutting exposure in the stock at present levels.

Dhampur Sugars is the other major player in North India after Balrampur Chini Mills. Dhampur Sugars has three mills in UP, with a total capacity of close to 20,000 tcd. The company also has a subsidiary, Mansurpur Mills, with a capacity of around 5,000 tcd.

The sugar division's performance has not been very impressive. The company has been facing cane procurement problems and may be forced to operate at lower capacity utilisation levels if the situation continues. Given that the efficiencies are determined by volumes, the lower capacity utilisation is likely to have a negative impact on the company's performance.

In addition, the company may have made some strategic errors. Diversification into unrelated businesses, such as chemicals and paper, is likely to affect the company. Given that the stock market has not been very kind to the sugar industry, the company has had to use debt and retained earnings to fund its expansion.

The company's earnings performance for the quarter ended June 2000 was not very impressive. Sales revenues remained more stagnant at around Rs 79.55 crore compared to the corresponding previous period. Operating margins declined from 13.70 per cent to 11.77 per cent. Post-tax losses increased from Rs 3.72 crore to Rs 6.37 crore.

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Thiru Arooran Sugars

While BCML and Dhampur are the leaders in the North, Thiru Arooran Sugars (TASL) is No. 1 in the South. In terms of capacities, TASL is not in the same league as BCML or Dhampur Sugars. The TASL stock trades at Rs 46, discounting the latest annualised earnings per share around seven times. The company also has interests in alcohol and bagasse-based power generation units.

The company's earnings performance for the first quarter of 2000-01 was fairly impressive. Sales revenues rose around 27 per cent to Rs 46.44 crore compared to the corresponding previous period. Operating margins improved from 41 per cent to 46 per cent. Post-tax earnings improved three-fold to around Rs 5.87 crore.

TASL has a more diversified income stream with a significant portion of the income coming from power generation. The contribution from power generation has been rising. For the year ended March 1999, sugar contributed around 53 per cent to the sales turnover, followed closely by power (34 per cent).

TASL's efficiencies are derived from the fact that it generates power with the crushed cane. However, the company has hived-off its cogeneration unit into a separate company, Terra Energy Pvt Ltd. TASL's future performance will depend, to a large extent, on the performance of the sugar division. In this backdrop, shareholders can stay invested.