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Aarati Krishnan

SHAREHOLDERS of The Oudh Sugar Mills can subscribe to the rights offer, which is being made at a significant discount to the market price. They may simultaneously sell their holdings in the open market as it may not be wise to enhance exposure to the stock at this juncture. The company has managed a turnaround in profitability over the last couple of years, on account of the upward spiral in sugar prices. The pace of profit growth may slow in 2005-06, with sugar output set to recover and prices set to enter a stable phase. However, at about three times the company's FY-05 earnings, the asking price for the offer is modest and should provide scope for reasonable capital appreciation over the next couple of years.

The Oudh Sugar Mills operates three sugar units at Hargaon, Rosa and Narkatiaganj in Uttar Pradesh, with combined crushing capacities of about 15,000 tonnes per day. It also owns facilities to manufacture ethanol and industrial alcohol. The company is among the larger players in the sugar industry. After notching up losses in the four years leading up to 2002-03, the company reported a turnaround in 2003-04 due to buoyant sugar prices caused by a sharp drop in the domestic sugar output. Profits have subsequently expanded three-fold in the first nine months of 2004-05, as benefits from a capacity expansion at Hargaon and a debt restructuring exercise also contributed to the bottomline.

In the coming fiscal, profits are likely to post modest growth, given the likelihood of a reversal in the sugar cycle and a flattening out of sugar prices. A recovery in sugar output for 2005-06 is likely to alleviate the deficit in the domestic market, though a tight demand-supply balance will continue to prevail. With rising realisations unlikely to contribute to margin expansion, the company's profitability may be driven mainly by increases in sales volume and further savings in interest cost from the repayment of short-term debt, using the offer proceeds. As a mid-sized player in the industry with a high gearing, Oudh Sugar Mills may be more vulnerable to any meltdown in sugar prices than frontline companies with sizeable scale economies and integrated facilities. However, over the next couple of years, the company should still be in a position to deliver the modest growth rates that are required by the rights offer price of Rs 50.

Background: The Oudh Sugar Mills, belonging to the K. K. Birla group is making this rights offer, in the ratio of 3:4, is Rs 50. The offer proceeds of Rs 38 crore will go mainly towards repayment of short-term working capital loans from banks. The rights offer will expand the equity base from Rs 10.4 crore to Rs 18.2 crore.

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