• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

M.R. Subramani

Investments in by-products yielding big returns

Chennai, Feb. 18 Sugar production in the country this year is expected to be around a record 240 lakh tonnes. The expectation, coupled with slow progress on the exports front, has led to a crash in the stock prices of the sugar companies.

On both the National Stock Exchange and the Bombay Stock Exchange, prices of most of the sugar companies are just hovering around their 52-week low.

For example, Balrampur Chini is ruling at Rs 64 against the 52-week low of Rs 57.70.

Similarly, Triveni Engineering is quoted at Rs 44.40, off the year-low of Rs 38.60. The one-year high for all the stocks are way off.

The market sentiment with regard to sugar stocks has taken a beating as the hopes of a record production in turn led to a fall in open market prices of sugar.

The prices, in fact, are ruling lower than the price of sugar supplied through the public distribution system in some of the States. Not surprisingly, most of the investors have kept away from the stocks.

Their stand has been further vindicated by the results churned out by the sugar companies.

For example, Balrampur Chini posted a net profit of Rs 19.1 crore in the third quarter ended December 31 against Rs 32.21 crore in the previous quarter. Similarly, Triveni Engineering has posted a profit of Rs 21.8 crore against Rs 30.7 crore in the previous quarter.

Raw sugar exports

To further compound the sugar companies' problems, raw sugar exports have affected shipments of refined white sugar.

What is happening is that most of the importing countries have built a capacity for refining sugar and, therefore, premium for white sugar is diminishing.

The sugar companies have been able to contract shipments to other countries at around $320-325 a tonne f.o.b.

A look at what is happening in the sugar sector makes one wonder if the hammering of the sugar stocks is justified?

What are the issues to be considered by investors if they were to find value in sugar stocks? Investors may, perhaps, look at these developments before they take a decision on sugar company stocks.

First, sugar companies have now begun to talk of exporting raw sugar. Will that happen? What has to be considered is which are the companies that have an export obligation pending. Will they be allowed to export raw sugar? Or will the export of raw sugar be treated separately?

The other issue is infrastructure for such exports.

Raw sugar needs to be exported in bulk and the country lacks infrastructure both for storage and transporting. Early days still and we are yet to hear what the Centre's views are, particularly given the fact that it is sensitive to rising inflation.

By-products

But there are other things that are worth considering. Sugar companies, these days, aren't confining themselves to just producing sugar.

These companies produce molasses and bagasse as by-products while producing sugar.

Some of the sugar companies are now investing in these so that their bottomlines may not be a cause for concern.

While mills use bagasse for cogeneration of power for their own use, they now have excess power to be sold. Some of the companies are mopping up significant revenue through this route.

For example, Balrampur Chini expects to mop up Rs 145 crore through sale of power during the current season (October 2006-September 2007).

Thiru Arooran is another one that expects to net over Rs 100 crore through cogeneration business.

Molasses is also as promising as cogeneration. Alcohol and ethanol derived from it are helping the companies net additional revenues.

With the Centre keen on doping petrol with ethanol, a continuous demand for it has been assured.

Again through molasses, some of the companies are deriving significant revenue. Bajaj Hindusthan generated Rs 134 crore during 2005-06 as income from alcohol sale.

And is there any guarantee that the mills are not hedging risks of a price fall in sugar prices?

Didn't someone do it three years ago? Something to ponder for investors there.

More Stories on : Sugar | Stocks | Insight | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Smart phones losing elitist tag

Copyright © 2007, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line