R K RESEARCH

∆
∆ ÉDGE 30th December 2008

INDUSTRY REPORT-‘SUGAR’

INDUSTRY OUTLOOK
India is the largest consumer of sugar in the world and the second largest producer next only to
Brazil. The sugar industry is a major supplier of by-products like molasses for alcohol, ethanol
and chemical industries, bagasse for paper industry. Indian sugar industry is dominated by the
cooperative sector, which accounts for more than 55 percent in terms of the number of factories,
installed. Maharashtra and Uttar Pradesh alone accounting for 60 percent of Indian's total sugar
production.

As against an average annual rise of 2.5% in world sugar production during the past ten years,
global sugar consumption has grown by about 2% per annum, while in India the consumption has
been higher at about 3.5% per annum. Indian sugar industry is the second largest agro-industry
located in the rural India. It has a turnover of Rs.700 billion per annum and it contributes almost
Rs. 22.5 billion to the central & state exchequer as tax, cess, and excise duty every year. With
more than 600 operating sugar mills in different parts of the country. Indian sugar industry has
been a focal point for socio-economic development in the rural areas.

SUGAR PRODUCTION(mn tonnes)

30
25.36
24.12
25

20 18.63 18.18
17.62

15 13.34
12.27

10

0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

www.rkfml.com 1
R K STOCK HOLDING PVT LTD.
A7, Block B1, Mohan Co Operative Ind. Area
Mathura Road, New Delhi 110 044
∆
CURRENT SCENARIO

The present condition of the sugar industry is largely self created. Substantial increase in the
volume of international trade in sugar presents an excellent opportunity to the Indian sugar
industry to embark on a regular plan for sugar exports. But the restrictive sugar policy along with
unstable sugar production pattern makes it an erratic trade on the world market. The sugar
industry is transforming itself into an integrated chain of value added products which helps in de-
risking the business model by evening out the seasonal volatility in the earnings stream. Mills are
converting industrial alcohol into ethanol which is being supplied to refineries for mixing with the
fuel and this value addition provides better margins as compared to industrial alcohol. Moreover
with lesser cane output this season realizations for industrial alcohol has improved compared to
last fiscal when there was a bumper crop and this should augur well for sugar companies during
the current fiscal.

Sugar prices has gained 29% this year amid speculation that declining output in India, the world's
second-biggest producer, will mean production will trail demand. The weakening currency means
that domestic costs will be cheaper for sugar makers relative to their export revenue in dollars.

WORLD SUGAR BALANCE (In mn tonnes)

2008-09 2007-08 % Ch
Production 161.649 169.002 -4.35
Consumption 165.547 161.752 +2.35
Surplus/Deflicit -3.89 +7.25
Import Demand 46.70 45.506 +2.63
Export Availability 46.79 47.92 -2.37
End Stocks 65.23 69.217 -5.76
Stocks Consumption Ratio % 39.40 42.79

DOMESTIC PRODUCTION

In 2006/07, India produced 25.36 mt of sugar. UP and Maharashtra together contributed more
than 67% to the total production. Maharashtra overtook UP & became the largest producer of
sugar. Its production increased from 5.9 mt to 9.6 mt this year. Higher yields and greater cane
acreage contributed to this increase. The sugar prices have started showing signs of stabilization
with the support of State & Central Government initiatives. The sugar sector is turning around
after a very difficult phase. The sugar production in the current year is expected to fall to 20 mt as
per industry estimates, while the government maintains that it would be 22 mt.
(mt = Metric tonne)

www.rkfml.com 2
∆
DOMESTIC SUGAR PRICES (Rs/Qn)
2000
1800
1600
1400
1200
1000
01

02

04

05

06

07

08
03
00
ar

ar

ar

ar

ar

ar

ar

ar
ar
-M

-M

-M

-M

-M

-M

-M

-M
-M
ct

ct

ct

ct

ct

ct

ct

ct
ct
O

O
O

The stock position had been showing an increase since FY 2000-01. However, prices showed
only a moderate decline till FY2001-02 mainly because of the price discipline imposed by the
monthly release mechanism. The situation changed from FY 2002-03 onwards with sugar mills,
burdened by a high stock position, took recourse to court orders to sell large quantities of sugar in
the domestic market. This resulted in a crash in sugar prices. Consequently, in June 2003, the
government stepped in and made an amendment to the Essential Commodities Act to enforce the
release mechanism. This resulted in a firming up of prices from that month, although the
overhang of past stocks resulted in the price growth being moderate. From January 2004 however
prices have seen a secular upswing.

MAJOR PLAYERS & CAPACITY UTILIZATION

Particulars M. Cap Capacity Production Sales (Rs. Cr.)

(Rs Cr. as on Cane ‘000 tons
26th Dec) (crushing/day) (12 mths)
Shree Renuka Sugars 1728.90 25250 332.66 640.00
Balrampur Chini Mills 1190.79 65000 914.87 1158.94
Bajaj Hinustan Sugars & Industries 164.37 6000 48.20 66.88
Ugar Sugar Works 130.16 10000 221.10 300.30
Triveni Engineering & Industries 610.00 580 - 801.07

www.rkfml.com 3
∆
COMPANY PERFORMANCE
SHREE RENUKA SUGARS LTD.

Shree Renuka Sugars created India’s largest ethanol capacity in response to the growing
optimism. The biggest achievement of Shree Renuka Sugars in the last two years. The company
has reported 61.33% increase in its production for the year 2006-07. As a logical extension of
this, Shree Renuka Sugars has emerged as the most valuable sugar company in India. SRSL
reports 47% & 10.3% decrease in its Net profit & Income respectively. On the other hand, there is
a slight increase in the EPS of the company.

(In Rs. Crore)

Particulars Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep.08
Total Income 218.5 170.3 205.6 479.8 612 548.7
PBDIT 58.7 19.9 49.1 70.9 68 48.9
PAT 31.5 2.4 27.2 30.4 23 12.1
EPS (Rs.) 2.56 2.28 2.05 2.71 2.40 2.69

Despite such plummeting results in the last quarter, there exists a large scope for the company
from a core business perspective. Five years ago, India’s largest sugar company accounted for
only 2% of the country’s market share; today, it accounts for 5% and we expect that scale and
consolidation will increase its share over the foreseeable future. The production is expected to
decrease from 479mn to 390mn for the next financial year. Renuka Sugars follows a financial
year from Oct-Sep.

REVENUE PROJECTION FOR FY08-09

(In Rs. Crore)
Particulars FY07-08 FY08-09(E) % Gr.
Sales 1871 2026.40 8.30
PAT 92.79 99.70 7.44
EPS( Rs) 2.69 3.61 34.20

The company has recently acquired 87% stake in Gokak Sugar Ltd.for Rs.69.3 Cr. In
Karnataka, having a crushing capacity of 2500 TD(Tonnes crushed Per Day ) & 144MW
cogeneration power plant at Kolavi village.

The company has decided to cal off the establishment of its new refinery of 2000TPD,
which was expected to commence operations at Mundra in 2009-10.

www.rkfml.com 4
∆
BALRAMPAUR CHINI MILLS LTD.

Balrampur Chini Mills (BCML) is a UP based manufacturer and marketer of cane sugar and its
by-products Balrampur Chini Mills Ltd is one of the largest integrated sugar manufacturing
companies in India. Its allied business consists of manufacturing and marketing of Ethyl Alcohol
& Ethanol, generation and selling of power and manufacturing & marketing of organic manure.
Company has nine sugar factories located in Eastern U.P.

BCML has posted a growth of 31.60% in its income generated in the Sep quarter. Although the
results of BMCL for the past few quarters are showing extremely volatile movements, but in near
future the company is expected to perform stupendous with an annual increase of 4% in the
demand of its product. Company follows a financial year of Oct-Sep.

(In Rs. Crore)

Particulars Jun-07 Sep-07 Dec-07 Mar-08 June-08 Sept.08
Total Income 375.62 297.97 437.72 311.16 316.9 417.06
PBDIT -6.07 2.72 43.48 134.52 84.13 72.59
PAT -47.31 -33.68 -0.06 65.65 16.85 14.58
EPS (Rs.) 0.62 -1.6 -2.81 -0.94 1.90 3.79

The drop in production estimated due to reduction in cane acreage, the sugar production in UP is
likely to reduce by 15% this season which should absorb sugar inventories thereby bringing
stability to sugar prices.

BAJAJ HINDUSTAN SUGAR & INDUSTRIES LTD.

Bajaj Hindustan Ltd., the Shishir Bajaj controlled company & is one of the largest Sugar
producers in India having two plants in the North Indian state of Uttar Pradesh. Bajaj Hindustan
Ltd. (BHSIL), a part of the 'Bajaj Group', ethanol manufacturing company, headquartered at
Mumbai (Maharashtra), India. The Company has ten sugar plants, which are all located in the
northern Indian state of Uttar Pradesh (UP).BHSIL follows a financial year of Oct-Sep.

www.rkfml.com 5
∆
(In Rs. Crore)
Particulars Jun-07 Sep-07 Dec-07 Mar-08 June-08 Sept.08
Total Income 18.73 29.41 19.79 66.97 75.05 184.47
PBDIT -5.77 -8.3 -2.35 28.89 0.49 -4.4
PAT -8.73 -14.11 -6.7 6.82 -36.16 -39.69
EPS (Rs.) -4.11 -6.7 2.10 3.04 -2.50 -6.90

BHSIL has increased crushing and distillery capacity more than three times in three years and
seems poised to drive revenue growth in a constructive pricing environment. We expect a sharp
rally in Bajaj Hindustan’s stock price as the company reaps the benefits of aggressive capacity
expansion in a constructive sugar pricing environment.

KEY CONCERNS

• Decrease in the Sugarcane Production

Around 78 per cent of the sugar produced in the world is created from sugarcane, with beet sugar
accounting for the rest. The cost of producing sugar from cane is less than the cost of producing
from beet. The main concern of sugar industry in India is fluctuations in sugarcane production
due to inadequate irrigation facilities, lower sugarcane yield, and frequent droughts in tropical
and sub-tropical areas where sugarcane is grown on a large scale. Most of sugar mills in India are
having daily sugarcane crushing capacity of 1250 tonnes. These mills cannot have economies of
scale so they have to incur high production costs.

SUGARCANE PRODUCTION

70 400.00
Thousands

68
66 300.00
64
62 200.00
60
58 100.00
56
54 0.00
2001- 02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Yield(Kg/Hectare) Production (mntn)

www.rkfml.com 6
∆
• Excessive Government intervention:

The government has often intervened in the sugar industry with ad-hoc measures aimed at
regulating the sugar industry. This intervention poses one of the biggest risks for the industry.
Being election year inflation control remains the highest priority for the government. This would
indicate that a restriction on sugar prices and the quantum of exports is inevitable.

• Deterioration in Soil Quality:

Quality of soil is deteriorating due to overuse of fertilizer & pesticides to increase the yield,
which may further lead to unhealthy crop of sugarcane & thus have a direct impact on the sugar
quality as well.

• Decline in Crude Prices:

The recent decline in crude oil prices has raised questions about the viability of ethanol. This
sharp decline in crude would curb the demand for ethanol, which would thereby, encourage
Brazilian mills to produce more sugar rather than ethanol. This will result in a lower deficit of
sugar in 2008-09 and hence, a decline in global sugar prices. Higher sugar production in Brazil
poses a threat to Indian imports, which in turn could compel domestic manufacturers to keep
sugar prices down.

• Technology:

Most of the sugar factories are more than 30 years old & still using the old technology. This
is the high time now these factories should adopt an upgraded technology for maximum
utilization of byproducts as an input for the other product.

FUTURE OUTLOOK

Sugar industry is the second largest agro-based industry in India. In the era of globalization, sugar
industry needs more competitive edge which can be given by way of modernization, enhancing
productivity, and manufacturing excellent quality sugar at competitive prices. Despite rise in cane
prices, higher realizations have led to a sharp increase in conversion margins. While projecting
the future domestic supply-demand scenario, particularly for 2008-09, ICRA does recognize the
fact that the same would be highly sensitive to (i) weather conditions and (ii) international price
trends, which would impact export possibilities for the next two years or so, the closing stock
position for the country is likely to be relatively comfortable at around 3-4 months’ consumption,
and the prices therefore relatively firm.

From the previous trends in the sugar industry it can be deduced that when closing stock was at
its peak in 2002-03, production witnessed a subsequent decline, resulting in higher sugar prices.

www.rkfml.com 7
∆
With closing stock peaking in 2006-07 & in 2007-08, we believe a similar pattern would emerge
causing production to decline in the forthcoming years to 20 million tonnes in 2008-09 and 18
million tonnes in 2009-10. Consequently, we also believe the lower surplus of sugar in the
system will keep sugar prices firm therereby, enhancing earnings for the company.

RESEARCH TEAM Phone: 011 4056 4444 Email:

research@rkfml.com
NAME DESIGNATION E-MAIL
Nirav Vakharia Chief Research Officer nirav.vakharia@rkfml.com

Ashwani kumar Astt. Research Analyst - Commodity ashwani.kumar@rkfml.com

Varun Gupta Astt. Research Analyst - Equity varun.gupta@rkfml.com

Swati Saxena Astt. Research Analyst - Equity swati.saxena@rkfml.com

DISCLAIMER

R K Stock Holding Pvt. Ltd has taken due care and caution in compilation of data. The guidelines
expressed above are the views of the Experts, and not a recommendation to buy or sell. Only
those investors who are aware of the risks inherent in securities trading should use this
information. The author does not accept any liability whatsoever arising from the use of any of
the above guidelines or its contents.
The views and investment tips expressed by investment experts herein are their own, and not that
of the company or management. R K Stock Holding Pvt. Ltd advises users to check with certified
experts before taking any investment decision. R K Stock Holding Pvt. Ltd does not guarantee the
accuracy, adequacy or completeness of any information and is not responsible for any errors or
omissions or for the results obtained from the use of such information. R K Stock Holding Pvt.
Ltd especially states that it has no financial liability whatsoever to any user on account of the use
of information here.
Disclosure: It is to be noted that the author or the organization may have outstanding positions in
any or all of the securities mentioned herein.

www.rkfml.com 8