The Hindu Business Line : Sweeter numbers from sugar cos

Is the sugar sector on the road to recovery? Unexpectedly strong earnings from sugar major Balrampur Chini Mills have given rise to optimism on this score.

The company’s net profit for the March 2008 quarter has grown three-fold to Rs 65.6 crore, though the sales actually declined by 22 per cent compared with the same period last year.

Earnings growth was aided mainly by a turnaround in the sugar business, which reported profits before tax (PBT) of Rs.43.8 crore this quarter, against losses last year. The sale of power — a by product — also chipped in with a Rs 49 crore contribution. A late start to the country’s 2008 cane crushing season has trimmed sugar output estimates for this sugar year(October-September) to about 260 lakh tonnes.

Factoring in consumption of about 220 lakh tonnes and exports of about 30 lakh tonnes, sugar inventories are expected to shrink by end of this sugar season. It is hoped that sugar prices may receive support from these lower inventories. Should this happen, companies such as Balrampur Chini may report strong earnings growth.

However, investors in sugar stocks need to take note of a couple of risks in this rosy picture. One, with inflation very much on the Government’s radar screen, any steep upward spiral in domestic sugar prices may well attract regulatory intervention. Two, the profitability of sugar producers, is predicated on how cane procurement prices move.

Cane prices for the current season are still being litigated and prices for ensuing season may also be pegged higher. Pending a resolution to this issue, Balrampur Chini has accounted for cane prices at Rs 110 a quintal in its results; if prices turn out to be higher, this may moderate those impressive growth numbers for the March quarter.

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