I have been tracking Andhra Sugar for some time now and would like to highlight the theme which I feel has potential to improve the numbers Company has been posting.
Intention is to play on the Sugar cycle with Caustic soda (Chemical Division) acting as a safety net.
Over the years Andhra Sugar has been generating around 70% of its standalone revenue through Chemical Division and remaining from Sugar. Since, sugar has been under performing for past few years (industry wide problem) the profitability of Andhra sugar was getting hit. Still, the numbers posted by Chemical division (Caustic soda and Industrial chemical) were able to digest the loss from sugar and came out to be in profits, overall. (Please see below image)
You can Click Here to go through the Standalone and Cons. segment numbers which I have plotted and get a feel of the theme I trying to share.
About Andhra Sugar:
The Andhra Sugars Limited was established on 11th of August , 1947.It has operations located at Tanuku, Kovvur, Guntur, Taduvai, Saggonda and Bhimadole in the state of Andhra Pradesh in Southern India producing 25 different products. It is 9th largest chlor-alkali producing capacity in the country and has one of the largest producing capacities in the southern India. Its products are as follows:
- Alcohol & Alco Chemicals
- Chloro Alkali
- Sulphuric Acid
- Super Phosphate
You can get further product-specific details from here.
- JOCIL Ltd.
- The Andhra Farm Chemicals Corp. Ltd.
- Hindustan Allied Chemicals Ltd. (Not yet operational)
- The Andhra Petrochemicals Ltd.
What’s going in their favour?
- Sugar has posted profits after several years and has break-even in 9MonthsFY17.
- Caustic soda has posted good numbers with an improved margin.
- Industrial Chemicals 9 Month Margins have doubled from FY16 levels.
- 33 MW coal based power plant at Saggonda is near completion and will provide saving in power cost, which is a key expense in Chloro Alkali segment. Thus, possibility of further margin improvement.
- Aspirin plant (US-FDA approved) achieved 75% capacity (PY 55%) and capacity expanded from 1000 TPA to 2000 TPA.
What are the threats?
- Both the segments: Sugar & Chemical are cyclical and pure commodities.
- Commencement of incremental caustic soda capacities in the southern market, coupled with caustic soda imports, could put pressure. (As per ICRA credit rating report. Click here to read the rationale.)
Questions in my mind:
- Caustic Soda segment posted good numbers in Q3, as both sales and margins expanded. What were the drivers here? Did we see improved realization or cost efficiency? Also, is there any recent capacity expansion in this division?
- With our own power generating capacity (33MW plant) what will be the future relationship with APGPCL, given the supply issues faced by us with them (61.59 cr invested)?
- What is the expected cane availability in ASL’s catchment area? Any issues or concern that they are witnessing in sugar segment?
- What is the update on 100 TPD Sodium Hypochlorite project (expected commencement was oct 2016)? What is the investment in it and potential revenue and margins from it? What will be the key market and customer for this segment?
- How has been the performance of aspirin segment?
- What is the installed capacity and utilization figures?
- What is the target optimum product mix? Gradually are they moving towards value added products, and aiming to use their existing chemical division capacity as a RM source or backward integration?
The story is looking attractive to me as it is a professionally run company with a long history, a strong reach in market in its respective products and good dividend payout in the past.
Pleasingly, all this is still available to us at:
PE of 6
Views are invited from fellow members.