The Hindu Business Line : K. M. Sugar: Avoid

INVESTORS who are risk-averse can avoid the initial public offer of K. M. Sugar Mills. Though the asking price is modest, the company's financial performance record is not consistent and there are superior investment options available in the universe of listed sugar companies. The fixed price offer, at Rs 52 per share, is to raise funds for expansion of cane crushing capacities from 4,500 tonnes crushed per day to 6,500 tcd at the company's unit at Faizabad in Uttar Pradesh. The project is to be fully funded by equity.

The company's financial performance over a five-year period has been inconsistent, with net losses in three of the past five years and a significant "other income" component in profits. It has also had sporadic problems servicing its debentures and loan obligations. There has been a substantial scale-up of revenues and profits in the nine-month period ending June 2005, as higher sugar prices and volumes of crushing bolstered profitability. Net profits for the nine-month period, after adjusting for one-time provisions, was Rs 11.74 crore, on revenues of Rs 119 crore. This translates into annualised per share earnings of Rs 13 on the pre-offer equity base.

This offer will substantially expand the equity base from Rs 12 crore to Rs 18.4. crore. The expansion project, expected to be completed in November, can bolster crushing capacities substantially from present levels. Taken with the robust outlook for sugar prices, the project has the potential to substantially expand earnings.

A key risk to the expansion project is the increasing competition for cane procurement in the areas surrounding the company's catchment region. Balrampur Chini's proposed project at Akbarpur, is in close to K.M. Sugar's unit. If this project is implemented; this could escalate competition for cane and drive up procurement costs.

With all its operations concentrated at one location and with only a mid-size plant, K. M. Sugar may be vulnerable to diversion of cane. K.M. Sugar derives the bulk of its revenues from sale of sugar. An expansion project for processing of fuel ethanol is on the anvil; but the company is yet to secure any fresh supply contracts from oil companies. Capacity utilisation on the existing distillery has been low. Therefore, unlike the larger integrated mills, the company does not as yet have access to alternate revenue streams from surplus cogenerated power or fuel ethanol. The company's revenue streams could be vulnerable to a downturn in the sugar cycle.

All these factors suggest that though the offer is modestly priced at about five times trailing earnings, it is unattractive to conservative investors with a long investment horizon.

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