Sugar industry got some more respite with government relaxing 60% output from Jute packaging. While earlier under Jute packing material Act 1987, the sugar manufacturers were supposed to pack 100% of their produce in Jute bags, now the norms have been relaxed and the manufacturers will have to pack 40% of their produce in Jute bags. This will lead to incremental savings for Sugar manufacturers to the tune of Rs 0.4 per Kg of Sugar which accounts for 2-7% of EBIDTA (earnings before Interest Tax depreciation and Amortization) and 4-11% of Profits before Tax estimates Achal Lohade at JM financials.
The Jute bags cost around Rs 35 per 50 Kg bag, which translates into cost of packing sugar at Rs 0.7 per kg. On the other hand the cost of HDPE (High Density Poly Ethylene) bag is much less. The 50 Kg HDPE bag cost Rs 15 translating into per Kg cost of packing coming to Rs 0.30. Therefore there will be savings of Rs 0.40 a kg for sugar producers.
Assuming 25 million tonnes of production and if entire produce was to be packed in HDPE bags, this would have amounted to a total savings of Rs 1000 crore for the industry. However, since the government has allowed only up to 60% of the packaging in HDPE bags, this would translate into saving of Rs 600 crore for the sugar industry. Lohade estimates production for key sugar players like Bajaj Hindusthan, Balrampur Chini, and Shree Renuka at 1,173,543 tons, 1,173,543 tons and 4, 60,000 tons respectively during FY14. Hence the cost saving for the players will be at Rs 28.2 crore, 21.2 crore and Rs 11 crore respectively.
In terms of profitability Lohade further estimates Balrampur Chini to see Rs 235.7 crore of Profit before tax during FY13. He pegs Shree Renuka’s PBT at Rs 174.8 crore while Bajaj Hindusthan is likely to see loss at PBT levels. Thus the cost saving on Sugar packaging accounts for 9.1% of Balrampur Chini’s PBT that is likely to be major gainer and move will be EPS accretive for Balrampur Chini.
