The Hindu Business Line : Simbhaoli Sugar Mills: Invest

SIMBHAOLI Sugar Mills is among the riskier exposures in the sugar sector because of its highly leveraged balance-sheet, inconsistent financial record and the competition in the sector in Uttar Pradesh.

However, with the sugar cycle in a favourable phase, the company could, over this year and the next, build on its recent return to profitability.

Investors can subscribe to the rights offer at Rs 60 as it is attractively priced compared to other sugar stocks. Its current market price is at about Rs 85.

Simbhaoli Sugar Mills plans to use the proceeds of this offer to install balancing equipment that will expand its cane crushing capacity from 7,500 tcd (tonnes crushed per day) to 9,500 tcd and expand sugar refining capacities. This will extend the processing season to 240 days from 180 now.

About 60 per cent of the offer proceeds will also go towards financing long-term working capital requirements. The expansion projects, already underway, are likely to be commissioned in December.

After making losses in the preceding years, the company managed a turnaround in 2004-05, as sharply higher realisations on sugar and alcohol, lower incidence of interest costs, and a tax shelter on account of the accumulated losses boosted profitability.

Excluding a one-time provision for cane price arrears, the company managed a net profit of about Rs 24 crore.

This translates into earnings per share of about Rs 12 on the post-offer equity base of Rs 19.76 crore. The rights offer demands a multiple of about 5 times on these earnings, which may leave some room for further appreciation. Frontline sugar companies enjoy price-earnings multiples of 10-14 times their trailing earnings.

Given the optimistic outlook for sugar prices, Simbhaoli Sugars appears capable of improving on these earnings over the next couple of years.

With cane output set to improve sharply in the 2005-06 season, the company can be expected to crush higher volumes of cane. The revenue gains from the expansion project will begin to be felt from December. Recent supply contracts with oil majors for supply of ethanol should bolster revenues.

However, there are also risks attached to the company's earnings outlook. The balance-sheet is highly leveraged, with the debt-equity ratio at a stiff 4.5 times and interest cover at a not-very-comfortable three times in March 2005. At the time of the offer, the company's corporate debt restructuring exercise was under litigation, as UTI, one of the debenture-holders, did not agree to the scheme. If the debt-restructuring package is implemented, it would be a positive.

These issues will not significantly impact earnings, if sugar prices continue to be robust and the company sustains strong earnings growth as it did in 2004-05. The present offer will reduce the debt-equity ratio to about 2.3, and will allow the company to reset its debt obligations at lower interest rates. However, in the event of a reversal in the sugar cycle (which is not imminent at this point in time), interest costs could eat into profitability.

Overall, it is the attractive price that makes this offer worth subscribing to. This would be a stock where investors should book profits once target returns are reached.

Background: Simbhaoli Sugar Mills operates a 7,500 tcd plant at Simbhaoli in Uttar Pradesh, which is proposed to be expanded to 9,500 tcd through this offer. The company also owns capacities to refine raw sugar and proposes to manufacture specialty sugars for bulk industrial buyers.

Of the offer proceeds of Rs 52.7 crore, Rs 20 crore will be deployed on the expansion of the sugar division and the balance to meet the long-term working capital requirements. The equity base will expand from Rs 11.1 crore to Rs 19.8 crore, after this offer. The offer is in the ratio of 4:5 at a price of Rs 60.

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