While higher input costs negated volume and price gains of sugar companies in the December quarter, prospects appear bright on lower costs and firm prices.
Going ahead, analysts believe that the higher volumes over the next one year will help not only bring in benefits of scale but also improve profitability in distillery and co-generation segments. For example, in the case of Balrampur Chini, these two segments are expected to contribute 41 per cent to the company’s operating profits on the back of robust ethanol (expected to move up by 7 per cent from the current Rs 27 to the litre) and co-generation realisations, believes a J M Financial report.
Though the decontrol of sugarcane pricing is unlikely, freeing of sugar levy obligation (currently 10 per cent of production) and any move to allow companies to export given that international sugar prices are at multi year highs over the next quarter are positives for the sector. Further, the expected fall in input prices by 15 per cent to Rs 2,200 per tonne over the next one year should aid in improving profitability. CRISIL Research believes that the profitability of the domestic sugar mills will increase in SS 2010-11 due to an expected decline in sugarcane procurement costs, with prices likely to average at Rs 29-Rs32 per kg in the Sugar Season 2010-2011.
Bajaj Hindustan
Led by higher volumes the company reported a strong 140 per cent growth in revenue for the first quarter ended December. However, during the quarter, the blended sugar realisations dropped by 12 per cent to Rs 27.51 a kg along with a 181 per cent growth in the cost of goods sold, which resulted in a mere 23 per cent growth in the operating profits. That apart, a 135 per cent increase in the interest cost to Rs 107 crore took a toll on profits, which declined 32 per cent. This was the first quarter, for the entire year 2011, analysts expect the performance to improve. On the back of higher volumes and realisation this year, the company is likely to report a 31 per cent growth in revenues. Importantly, they expect margins to improve due to low production cost as cane prices which were Rs 24.5 per kg could come down to Rs 21.8 per kg. Taking these factors into account, analysts expect the company to make a profit of Rs 41 crore in 2011 and 136 crore in 2012, which is significantly higher compared to just Rs 3 crore profit reported in the year 2010.
| HIGH ON REVENUE, LOW ON PROFIT | ||||||||
| In Rs crore | Bajaj Hindustan | Dhampur Sugar | Renuka Sugars | Balrampur Chini | ||||
| Dec.qtr ‘10 | % chg | Dec.qtr ‘10 | % chg | Dec.qtr ‘10 | % chg | Dec.qtr ‘10 | % chg | |
| Sales | 1,476 | 140 | 486.73 | 45 | 2247.00 | 57 | 530.55 | 22 |
| Ebdita | 267.91 | 23 | 41.58 | -63 | 356.60 | -5 | 73.35 | -45 |
| Interest | 106.99 | 135 | 16.90 | 32 | 116.50 | 296 | 17.36 | 0 |
| Total expenditure | 1,215 | 193 | 450.43 | 91 | 1947.00 | 82 | 459.14 | 49 |
| Adjusted net profit | 57.86 | -32 | 7.76 | -86 | 66.40 | -75 | 23.37 | -70 |
| Source: Capitaline, % change is y-o-y | ||||||||
Shree Renuka Sugars
The company reported a strong 57 per cent growth in revenue backed by higher volumes particularly from its Brazilian subsidiaries. However, operating margins dipped due to higher cost and lower realisations both in the domestic and international operations. Besides, there was a 300 per cent jump in the interest cost, which led to a 75 per cent decline in the net profit to Rs 66.4 crore. Analysts are positive on Shree Renuka given the expected turnaround in the domestic business, improvement in the operating margins as a result of lower cane prices and higher contribution from Brazilian operations. The company is expected to report a Rs 470 crore net profit for the year 2011 and Rs 731 crore in 2012. The stock is trading at 11 times its FY 2010-11 estimated earnings per share and 7 times FY2011-12 earnings which analysts considered to be reasonable and expect further upside from hereon.
Balrampur Chini
A volume growth of 17.6 per cent helped Balrampur Chini to post a 22 per cent increase in revenues. However as a result of the higher operating cost, operating margins declined to less than 13.6 per cent in the quarter ended December. Though interest costs remained under control, lower operating margins and higher depreciation led to a 70 per cent decline in the net profits. For the full year 2011, analysts estimate a 20 per cent growth in revenue along with 400 basis point improvement in operating margins. Also, as the interest cost and depreciation are expected to remain flat in the year 2011, analysts expect its profits to reach Rs 143 crore as against Rs 28 crore profit in the year 2010. Stock is fairly valued at 13 times its 2011 earnings per share and nine times 2012 earnings per share.