Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!

A very old news paper clipping on Andhra Sugars has got me more interested in it
http://www.thehindubusinessline.com/opinion/they-propel-our-space-programme/article2900470.ece

It says:

ANDHRA SUGARS’ EXPERTISE

In space and rocket technology, liquid, solid and hybrid propellants are used. Liquid propellants are derived from petroleum, cryogenic (low temperature) and hypergols (instant igniters). Solid propellants are usually nitro cellulose and nitro glycerine etc., while a hybrid fuel is a mix of liquid and solid. Andhra Sugars has established such skills in its plant located in a small village called Saggonda, approximately 30 km from Kovvuru near Rajahmundry in coastal Andhra Pradesh. The plant routinely produces caustic soda. Hydrogen, which is the raw material for the propellant that the company is making to meet the demands of the Indian Space Research Organisation (ISRO), is a by-product. ISRO uses liquid hydrogen as the propellant in the Geo Stationary Launch Vehicle (GSLV). The GSLV, which can place heavier satellites of the Insat class in orbit has three stages, which are sequentially ignited for the rockets to zoom into space. They are the solid propellant (first), liquid propellant (second) and cryogenic propellant (third). To the credit of this private sector enterprise, Andhra Sugars now fabricates all these propellants.

With technical support from ISRO scientists, the company has set up a facility to liquefy hydrogen gas and then get the desired purity at the plant. This follows an agreement signed in the year 1997 with ISRO. The ISRO got actively involved in cryogenic rocket technology to power the GSLV with initial help from Russia. It was in 2003 that Andhra Sugars signed a formal contract and the plant was established in 2006, says Mr G. Ramesh, a top executive at the plant.

Andhra Sugars has a 20-year contract with ISRO for the supply of propellants. It is the only fabricator of the key material in the country at present. The ISRO has a small facility at Mahendragiri, in Karnataka, where it undertakes tests for cryogenic technology development. Given the association of Andhra Sugars from the mid-1980s in the space programme, ISRO has also supported it in setting up the plant in Saggonda.

ISRO has, to its credit, developed a sound culture of involving the private sector in several of its projects, both for launching and converting the huge amount of satellite data generated towards applications for national development.

Mr Ramesh said separation of hydrogen from caustic soda is easy. However, the difficult part is to liquefy and then purify hydrogen gas to meet the stringent standards demanded by ISRO, especially for the GSLV flight. The company has imported the necessary plant equipment to fulfil the task. It has taken a couple of years, but now it has trained people and gained technical expertise to do it, says Mr Ramesh.

On January 28, 2012, the first batch of liquid hydrogen was dispatched in a special tanker to make sure that the liquid hydrogen is maintained at 20 degrees Kelvin or minus 253 degrees C (cryogenic temperature). To transport the material, a tanker, which is thermally insulated has been specially imported from Europe, he explained. It takes five days to reach the material to Mahendragiri.

Liquid hydrogen is known as rocket fuel because of its wide applications in space technology. It is also used as the fuel storage in an internal combustion engine or fuel cell. Interestingly, hydrogen gas as fuel to power transport vehicles is gaining momentum. Cars and buses running on hydrogen gas have been demonstrated.

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The monthly price chart of Bajaj Hindusthan offering a good long term investment opportunity

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Sugar prices have been consistently inching up (from 25-26 levels to 31-32 levels). I was speaking to a sugar trader yesterday who told me on good authorities that Triveni engineering is not even offloading a single bag of sugar because it expects prices to rise further

Big move expected in sugar prices…will it be a down move in line with the falling international sugar prices (ICE Sugar 11 is now around 13.50 cents) or will it be a big upmove in anticipation of low plantation of sugarcane in Maharashtra due to 2 years of back to back drought…??

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Dear Fatimaji,

Controlling factor for all sugar stock will be ICE Future No.11. It is passing through a correction phase right now and should bounce back any time. Meanwhile it is an opportunity for those who want to ride bull phase in sugar stocks. ICE Future has already broken down ward trend which lasted almost 5 years.

Your chart on Bajaj Hindustand is precise and stock can bounce back after touching down ward trend line. Similar phenomenon will be observed in all sugar stocks and most of them should move in tandem. Investors can take suitable position and enjoy the ride.

  • Sugarbull ( Bitterbull)

Last Friday the sugar delivery price was 31.78 rupees and now today on 3rd Feb, 2016 the sugar delivery price has jumped 32.78 rupees…the bollinger bands on daily charts have gone into initial stage of expansion… It does appear that the big price breakout will be an upside breakout…Investors can now hopefor the next leg of rally in sugar stocks once the Nifty stablizes…

As pointed out in the previous post, the domestic sugar price (delivery) is in uptrend. It has now crossed 33 rupees /kg. Balrampur has come out with Q3 profit of 86 crores when the sugar realisation average price of Rs 27.10 / kg.

In Q4, the average realisation price for sugar is bound to be above 29-30 rupees per kg.
Further, all the sugar mills have not booked any inventory gains in Q3. If inventory gains are recorded in Q4, then that would be a big boost to the profotability of the company.

At a time when the NIFTY is expected to show weakness in April / may and banks may come out with very bad Q4 numbers, Sugar companies are expected to come out with stupendous results… It is quite possible that balrampur may report more than 200 crores profit in Q4…so is the case with other sugar stocks too.

On daily charts, most of the big sugar cos (other than Bajaj Hindusthan) are showing very clear signs of turnaround.

Niraj,
What is the story here in Rajshree sugars, it is given highest rating ?

Rajesh, Rajshree sugar is TN based among better managed companies. TN based sugar companies from last 2 sugar season is facing drought conditions, lower sugar production, recovery and realization. Any of TN based sugar companies including EID parry has so far not done well. Predominately mostly UP based sugar companies has participated in last rally so far. TN govt also have many restrictive taxes and duties on alcohol, molasses and sugar and even fix SAP of Rs 285 per qt with relatively lower recovery rate. Even they dont allow sugar companies to sale ethanol to OMCs and take advantage of new central govt ethanol policies. Also TN based sugar companies are not politically influential like UP and Maharashtra. Next year due to better rain in TN, if sugar prices remain supportive than TN based sugar companies likely to perform better. I have not provided any rating to any companies, it is just indicative of maximum potential gain in best case scenarios which is mainly based on sales potential of each companies as sugar is a commodity and there is not much differential pricing between various mills. For UP based sugar companies so far it is progressing as expected. Even Shree Renuka and Bajaj Hindustan (due to heavy debt level) has not moved much comparatively. Markets tend to pick their own favorites in these kind of rallies and curently Dwarikesh, Dalmia Sugar, Triveni, Balrampur and Dhampur is best placed based on last 2 quaters turn around results. Most of TN or Karnatka or Maharashtra based sugar companies are still in loss but may be once sugar prices cross Rs 35 they may likely to outperform.

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We need to keep in mind that at these level of sugar prices only Balrampur can be very profitable sugar business with cost of producing sugar around Rs 27 and no much interest to pay due to lower debt level. For most other sugar companies to be sustainably profitable sugar prices should be more than Rs 31 - 34 due to high level of debt many of them have to service. So far only companies with high level of inventory level which is marked down due to lower sugar prices of around Rs 24- 25 and now readjusted to Rs 28-30 due to much higher prices of inventory are showing profit. At operating level for sugar business to be profitable at current sugar cane prices, sugar prices need to be between Rs 31-34 depending upon mills cost structure, location and state govt policies. Also high debt companies may go for QIP or fresh equity infusion which may dilute share of existing holders in those companies. Already Bajaj Hindustan, Shree Renuka, Rajshree and Parry sugar is working on these direction to resolve their current high debt level.

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I would like to add a little bit to the above… In the sugar down cycle, Bajaj hindusthan has diluted uts equity by 6times and its equity has increased from around 20 crores to 120 crores.

Renuka too has diluted ite equity by bringing in Wilmar and its equity base stands doubled.

On the other hand, about 4 years ago when the stock price was around 85, Balrampur did a major stock buyback and reduced its equity.

Thus in the severest downcycle for sugar industry… Balrampur has paid dividends for 4 years, did a buy back and reduced equity and still managed to make good profits in most of the years. While the other big two… Renuka and Bajaj, despite massive equity dilution are continuously incurring heavy losses.

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As per recent ISO report deficit for sugar for year 2015 16 lifted to about 5 million tn from previous around 3.5 million tn. Due to this news sugar future in international market has jumped by more than 5 % in matters of hour. Agrimoney news link
Another related news for indian market. According to this Maharastra Cooperative minister expects sugar prices to touch around Rs 50 per kg in next 1-2 years. Maharastra Cooperative minister statement link

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thanks for your post.i am also tracking sugar sector closely .
after ISO report there was a gap up opening on London sugar and extending gain up to 7% finally closed @ 6.29% up @days high.
right now sugar 11 in USA is up 9.07%.
there is a change in sector for sure …keep me inform as you get any new news.

discloser …balrampur and dalmia suger more then 10% of portfolio.

I see no mention of EID Parry…How does EID parry fit in this picture…Its up 6% in the day so far…

Hi Niraj,

How one should determine cost of production for sugar companies? I believe cane cost is similar in a particular state (like for UP its SAP and for other states FRP) and other production cost should be also in a similar range (±10%) based on operating efficiency and operation scale.

In such a scenario why there is a large difference among different companies? i can only thought of transfer pricing mechanism for production of ethanol and power.

would like to have your inputs.

Regards,
Apurva

Hi Apurva, i am not an expert in sugar industries. However let me try to answer some of the related questions.
(1) Some well run companies like Balrampur , Shree Renuka, EID Parry , Parry sugar etc has low over head cost and due to their integrated nature and economy of scale and better relationship with corporate consumers can charge bit higher prices for their sugar which can add extra to their bottom line. Also these companies do regular interactions with their area farmers about best seeds and variety of sugarcane to be planted etc which help in better recovery and realization. Also because of their larger influence and political support whatever byproducts they produce for example: ethanol, alcohol, power etc can always be evacuated at best favorable terms by respective bodies which add to their better profitability and gross margin.

(2) TN for last 2 seasons are facing acute drought conditions and similar conditions is likely to be faced by Maharashtra and Karnataka based mills for next year. even though these two states are already FRP linked still due to poor recovery and less quantity of sugarcane production they are not likely to best suited to take advantages in sugar price recovery. UP based companies has least drought concern due to highly irrigated areas and their recovery rate due to better farming practices and seeds are moving upwards and gap between Karnataka and Maharashtra and UP based sugar mills recovery may likely to reduce at least in near terms.

(3) All these small individual factors lead to gross profit margin enhancement of few percentage point for better and efficient mills. Also because of their better inventory management and better long term relationship with big customers they are not inclined to force sale their sugar to repay the farmers like most other mills has to do.

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Thanks Niraj,

Do you have any breakup / matrix where we can understand the overall cost structure and profitability of individual sectors.

Like sugar where we have to consider FRP / SAP, transportation cost, taxes / subsidies and production cost to calculate cost of production. (Any figures to understand the same).

Similar thing for Ethanol and power.

Regards,
Apurva

Hi Apurva, To understand this best source may be to go through Annual reports of Balrampur and Dhampur for last 10 years. It can definitely give you better prospective of cost of various sugar and ancillary business. Also Rangarajan Committee report on decontrol of sugar industry in india which can be basis for FRP and decontrol in future and CACP report of fixing FRP of each season can be good place to develop better understanding in these areas. You can find all these documents through google as file size is big for upload. Sugar industry in india is not currently economically viable and not competitive with sugar producers like Brazil and Thailand. Fixed cost for the industry is way to high (just sugarcane cost anywhere between 75 to 90 % for different states for sugar price level of around 30). Also to invest in any industry we just need to be roughly right and not precisely right. Also over long term indian sugar prices and international sugar prices are highly correlated.
Rangarajan committee report oct 2012.pdf (723.5 KB)

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