The Hindu Business Line : Upper Ganges Sugar: Avoid

Shareholders can consider giving the rights offer of Upper Ganges a go by as the stock trades at about the same price as the rights offer. As the global sugar prices are softening, its core business can take a beating. However, prospects appear to be bright on the ethanol front.

Upper Ganges derives 90 per cent of its revenue from sugar, while tea accounts for about two per cent. Upper Ganges, with an installed capacity of about 14,250 tcd (tonnes crushed per day), is a mid-size player in the sugar industry. Though a corporate restructuring of the group's sugar business could launch the combined entity into the league of large players, this appears unlikely in the near future.

Sugar prices

Upper Ganges' earnings are subject to the vagaries of the sugar cycle. Though prices in the domestic market appear to be on a firm footing backed by a stable supply-demand situation, prices on the global front are worrisome. Export options for the industry have been reduced, as prices in the global market appear to be on a downward trend and the government has retained the ban on exports through the normal route. This could put the industry in an excess supply situation and, in turn, lead to margin pressure once the proposed industry wide capacities go on stream.

Risks in the sugar industry are high, as the Centre and State governments regulate procurement prices of sugarcane. A hike in the Statutory Minimum Price or the State Advised Price of sugarcane can impact Upper Ganges, which already operate at margins lower than the industry majors. A government-imposed cap on sugar prices could squeeze its margins. This threat appears likely on the back of rising domestic sugar prices.

Ethanol blending

A positive for the industry is the Government's plan to blend ethanol with petrol. The programme for ethanol blending appears all the more likely with crude oil prices having hit historic highs and the Government facing pressure on fuel price hikes. Integrated players such as Upper Ganges will benefit from this programme. The contribution of industrial alcohol, which chips in about six per cent of revenues, is likely to increase.

Objective

Upper Ganges, part of the K. K. Birla group, plans to utilise the entire net proceeds of the issue to repay a substantial part of debt — about Rs 68 crore of its working capital loans.

This may raise the possibility of a corporate restructuring of the group's sugar businesses.

Offer details: On offer are about 46 lakh shares at Rs 150 in the ratio of 13 shares for every 20 held.

Enam Financial and Intime Spectrum are manager and registrar to the issue respectively. The offer closes on July 27.

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