With abundant opportunities available in India for sugar leaders to acquire their smaller counterparts, the industry is moving steadily towards consolidation.
The government of Uttar Pradesh, the second largest producing state, decided to sell or transfer the management of 25 loss-making co-operative mills to suitable bidders. The bids got overwhelming response from competing companies. Uttar Pradesh has 154 sugar mills, of which about 132 remained functional this year.
Maharashtra, the largest sugar producer, is also studying the UP model, of selling loss-making sugar co-operative mills to private companies. In early October, the Maharashtra government started liquidating 31 cooperative sugar factories and framed a lease policy for sick units.
The country’s largest sugar producer, Bajaj Hindusthan, is looking for acquisition opportunities in Uttar Pradesh to address the mass consumption market of Jharkhand and West Bengal. According to a company official, the company has about Rs 800 crore of cash balance in hand, which it wants to utilise for acquisition.
“We are selling sugar in eastern Uttar Pradesh at a premium of Re 1-3 per kg. We are eyeing a virtual monopoly in this region which will be possible through acquiring existing mills with larger presence there,” he said.
According to industry sources, Bajaj Hindusthan held several rounds of talks with Kolkata-headquartered Balrampur Chini for acquisition, which the former confirmed and the latter denied.
The top 20 sugar producers in India had a total cash balance of over Rs 1,600 crore in September 2009, due to record high sugar prices.
However, said Sanjay Tapriya, chief financila officer of the UP-based Simbhaoli Sugar Mills Ltd, “this is not the right time for acquiring even sick units because of selling companies’ high expectations in the wake of upbeat sugar prices and positive sentiment, at least in the next two years”. That time is a little down the line, he felt.
A sugar deficit is likely to continue for the next two years in India, with next year’s output estimated at 21-22 million tonnes (mt), as against 16 mt during the current year. Consumption is estimated to show an annual growth of five per cent, to about 24 mt by next year.
Tapriya added that existing sugar mills are currently operating at 60 per cent of their capacity which, in addition to low recovery, makes acquisitions costlier at least by 40 per cent.
In case, the industry’s output ezxceeds demand, as estimated to happen after two years, smaller companies would then find difficulty in selling their output, as larger companies would eat their market, Tapriya added. Gradually, small sugar mills would find procuring cane difficult, as their working capital would be squeezed.
For companies like Shree Renuka Sugars (SRSL), acquisitions in Brazil made sense because of higher availability of cane and high recovery. In the first acquisition of any foreign sugar and ethanol unit by an Indian company, SRSL acquired Brazil’s Vale Do Ivaí SA Açúcar e Álcool at an enterprise value of $240 million (Rs 1,112 crore).
The company early this week also announced agreement with another Brazilian company, Grupo Equipav, for acquiring 51 per cent stake at an investment of Rs 1,530 crore ($330 million).
