Bajaj Hindusthan, Balrampur Chini and other sugar companies are expected to post higher profits in the financial year ending March 31, 2008, as a decline in cane production drives up the prices of the commodity.
Companies are selling sugar at about Rs 1,800 a quintal against an average price of Rs 1,450 a quintal during the previous quarter, a jump of over 24 per cent.
“The current and next two quarters should be better, thanks to the higher sugar prices as production is set to decline. Our company accounts for 75 per cent of the season’s production in stock and is well placed to take advantage of the rising prices,” said Arhant Jain, president (finance) at Dhampur Sugar Mills.
The reason for a firm-up in prices is the projection of a drop in output after two years of record production. The production of sugar in this financial year is expected to drop by 20 per cent. The food ministry, in consultations with the cane commissioners of major producing states, has arrived at a provisional sugar production estimate of 22 million tonnes for the 2008-09 season (October-September).
The key reason for the shift is that sugarcane farmers have cut the acreage under sugar and shifted to remunerative crops such as paddy and oilseeds. The farmers also shifted production because of rising arrears, mainly in Uttar Pradesh.
These factors, coupled with a shortfall of rain in the southern part of the country and diversion of cane to the unorganised sector, could push the sugar prices higher by as much as 25 per cent, Credit Suisse said in in its Indian sugar industry outlook. Record output and high sugarcane prices had affected the margins in the last two years.
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“The rise in sugar prices is encouraging and sugar companies will perform relatively better than last year. However, unless the sugar prices move beyond Rs 20 a kg, it will be difficult for them to report good profits,” said Vikram Suryavanshi of Karvy Stockbroking. While sugar accounts for about 70 per cent of revenues for most companies, value-added segments such as cogeneration and alcohol are also doing better than the last quarter.
The bigger companies which have adopted an integrated model are expected to benefit the most. Distillery and power can add as much as Rs 6 per kg of sugar sold, helping the margins to expand faster.
However, the union government may not be pleased to see sugar prices going beyond the Rs 20 mark. Sugar, as a commodity, has always been vulnerable to immediate government action because of the high weight allotted in the wholesale price index (WPI) inflation. The sweetener’s weight in the WPI at 3.62 per cent is more than cement’s 1.73 per cent and wheat’s 1.38 per cent, and just lower to iron and steel’s combined weight of 3.64 per cent.