The Hindu Business Line : For sugar cos, by-products look sweeter

AFTER a spate of teething troubles, by-products such as power and ethanol are now sweetening up the earnings of sugar companies. Investments in power cogeneration and ethanol are getting a boost from lower capital costs and a more friendly policy environment. Profits from alcohol and surplus power contributed Rs 35.6 crore, or a third of Balrampur Chini Mills' profits before tax for the year 2003-04; thrice its contribution last year. Other large sugar producers have also seen a sharp jump in the sales and profits contributed by by-products in the latest financial year (see table).

Newly put up capacities for power cogeneration and alcohol, have had a big hand in pegging up the contribution from by-products this year. Facilities for conversion of bagasse (a residue from cane-crushing) into power, or for processing of molasses into alcohol, are not exactly new to the sugar sector. Players have experimented with these ideas since the early 1990s.

But those who have put up new facilities for by-products, say that the climate for such investments has turned particularly favourable over the past couple of years. "The capital costs for putting up a cogeneration unit were at Rs 4 crore per MW in the mid-1990s. Now the costs have halved to Rs 2 crore per MW," says Mr M. Manickam of Sakthi Sugars, which recently added a 32 MW cogeneration unit at Sakthinagar. Added to this, is the fact that States are willing to pay a better price for the surplus power exported to the grid than before. "In the 90s, sugar units got no more than Rs 1.80 per unit on surplus power exported to the grid; now we get over Rs 3," he points out.

The producers are hoping for even better prices from a re-assessment of tariffs, if the electricity reforms take off. Power tariffs now paid to sugar producers are pegged to the revenues earned by electricity boards from high-tension users. This sets a cap on realisations, irrespective of cane costs. "But we are hoping for prices of between Rs 3.50 and Rs 3.90 per unit, if power prices are pegged to costs," says Mr S.V. Balasubramaniam, Chairman, Bannari Amman Sugars.

Players are also looking to higher realisations from industrial alcohol and ethanol, derived from molasses. In 2002, the Government kick-started a proposal for the blending of ethanol into petrol for sale as automobile fuel, to the extent of 5 per cent. Bajaj Hindustan, which recently doubled its alcohol capacities, has reported a 62 per cent increase in alcohol revenues for the year ended September 2003, due to higher realisations on alcohol and supplies to oil companies for fuel-blending.

With industrial alcohol prices ruling at over Rs 30 a litre, this is, at present, a more lucrative by-product for sugar companies, than is the ethanol supplied to the oil companies (which fetches about Rs 15-17 a litre). But if ethanol-blended fuel does catch on as expected, sugar companies would have an assured outlet for surplus cane, when the sugar cycle goes back to its years of burdensome surpluses.