All is not sweet for the country?s sugar manufacturers, especially, ones based in Uttar Pradesh. While sugar prices remain depressed with marked oversupply and increased production, the scrapping of Uttar Pradesh?s Sugar Policy 2004 by the newly elected state chief minister has added to the woes of players.They can no longer avail of the incentives that had attracted them to the state in the first place.
In the decade spanning 1994 to 2004, hardly any sugar plants came up in Uttar Pradesh barring one or two. But, 2004 onwards, the picture changed dramatically. Almost 30 new mills came up in the state in the span of three years while some more are on their way this November, the next cane-crushing season. The erstwhile policy attracted an investment of close to Rs 7,000-8,000 crore from roughly 10-12 sugar companies as it provided major sops to sugar manufacturers if their investment threshold for setting up new plants was not below Rs 350-Rs 500 crore respectively. The benefits included transport and tax subsidies, exemption from entry tax on sugar, trade taxes on molasses, stamp duty and registration charges, etc.
For the larger UP-based sugar manufacturers tying up the necessary funds for their projects under the 2004 policy wasn?t difficult as evident from the fact that much of the capacities announced have come up in the state. ?Much of the money has been ploughed in already,? says Sanjay Tapriya, director, finance, Simbhaoli Sugars, which has added a new plant under the policy taking its overall tally to three. Its cane crushing capacity as a result of this expansion has increased to 20,000 tcd, while the distillery capacity has gone up from 90 kilolitres to 120 kilolitres, with a further 90-kilolitre addition envisaged. Power co-generation, on the other hand, is about 35 megawatts.
Though Simbhaoli?s capacity expansion is significant, it is lower than that of rivals like Bajaj Hindusthan, Balrampur Chini and Triveni Engineering & Industries, who have been very aggressive in their drive to ramp up capacities following the policy in August 2004. Bajaj Hindusthan, for instance, had merely two mills prior to 2004. From 2004 to now, the figure has gone up to 10. Some four more plants will go onstream by November this year.
This rush to set up capacities in Uttar Pradesh has obviously impacted production. From 5.7 million tonne in the last season (Oct ?05-Sept ?06), the figure for the current season (Oct ?06-Sept ?07) has been estimated at about 8.5 million tonne. Other states too are expected to see a marked increase in sugar production this season. For Maharashtra, for instance, the sugar production is expected to be close to nine million tonne ?up from 5.4 million last season.
This increase is sure to not let prices rise in a hurry. Not surprisingly, manufacturers, both UP-based and non-UP-based, are turning to the diversification model, that is, to the production of ethanol and power co-generation in addition to sugar production, to hedge risks against the uncertainties of the sugar cycle.
By some estimates, capacity accretion in ethanol in UP alone has been about 40% in the last few years. Power co-generation, on the other hand, has become lucrative, given that the state is power-deficit and injecting surplus power into the grid makes great commercial and economic sense. ?The return on investment in power co-generation and ethanol production are much higher than sugar production,? says a director with a UP-based sugar company. According to some observers, power co-generation and ethanol production could give as high returns as 27-28% to sugar production?s 13%.
In a recessionary market ? what currently exists in the sugar sector ? there is no question of a positive return in sugar production. The numbers are negative since cost of production is higher than the selling price of sugar. For instance, the per-kilogramme sugar price in India at the moment is Rs 12.50, while cost of production is about Rs 17.60 in Uttar Pradesh and Rs 13.60 in other sugar-producing states. Government policies do not help either. The bane of the sugar industry in Uttar Pradesh is the high cane price at Rs 13.60 per kilogramme to rest of India?s Rs 9.60 per kilogramme. It is so beacuse of UP state advised Statutory Minimum Price .
The recovery rate of sugar from cane in UP is also lower than the recovery rate in other sugar-producing states, especially, the south and the west, where it is about 11.5% to the former?s 9.5%. UP manufacturers have to crush more cane to get sugar pushing up the cost of production. This is in stark contrast to Maharashtra and Karnataka, where cane farmers and sugar manufacturers have been given sizeable subsidies since the start of the sugar downturn early this year to rein-in cost of production.
Though diversification into ancillary areas is important and necessary for most sugar companies to be able to derisk their models effectively, the fact remains that the exercise is far more sturdy and robust in non-UP regions, especially, in the south, in states such as Tamil Nadu (TN). Sugar season being longer in the south, almost 270-300 days as opposed to north?s 150-160 days, permits higher yields per acre as well as better capacity utilisation of plants. ?In TN, the yield per acre is about 41-42 tonnes as opposed to UP?s 22-23 tonnes,? says P Rama Babu, MD, EID Parry.
?You can sweat your asset more,? says M Manickam,vice-chairman and MD of Coimbatore-based Sakthi Sugars ? a point reiterated by Narendra Murkumbi,MD, Renuka Sugars, a player in the west and south of India as well as Babu of EID Parry. ?UP has a harsh winter and summer. Their sugar season lessens dramatically as a result. They have to make up for the loss by larger capacities that can crush cane quickly. On the positive side, they have a larger crop, more water and land available for cultivation as opposed to the south,? says Manickam.
Due to these factors, players in the south are predisposed to diversification. Players such as EID Parry have been early adopters of the model. The company at present has a cane crushing capacity of 16,100 tcd, a distilling capacity of 40 kilolitres per day and power co-generation of 65 MW.
Rivals like Sakthi and Renuka though have been far more aggressive in their endeavour to diversify, with capacity addition being significant over the last few years. All this capacity addition is obviously spurred on by the growing demand and need for ethanol and power in the country. Renuka Sugars, for instance, is the largest supplier of ethanol to the Central Government?s 5% Ethanol Blended Petrol (EBP) programme, which was flagged off recently. The company will supply close to 217 million litres of the total 1,000 million litres earmarked under the programme over the next three years. According to observers, if blending goes up to 10%, it would mean that consumption of the fuel would only go up, implying better capacity utilisation for players.