Businessworld
M Allirajan
Two years ago, being a sugar company in india was a sweet proposition. Global prices for sugar were going through the roof, demand was strong and the monsoons were plentiful and on time, assuring record crops of sugarcane.
It seemed improbable that this fairy tale for sugar producers would last, and it did not. In the last two years, prices have collapsed due to a global glut. From being one of the world leaders in sugar production, along with Brazil, the Indian industry has deeply imperiled itself due to faulty government policies and an inherent inflexibility to diversify.
Still, while sugar companies in the north of India, specifically Uttar Pradesh, are struggling to survive, a whole new transformation is taking place in the south of India as companies are exhibiting a Darwinian ability to adapt, morph and survive by exploring different product mixes and alternate sources of revenue. So much so that many of these are looking less like traditional sugar companies and more like alternate energy companies of the future.
Sugar Isn’t The Only SweetenerSugar has proved itself to be a volatile commodity with regular boom and bust cycles. Moreover, while sugar is growing at a measly 3-4 per cent, the demand for ethanol has virtually doubled in the past year and the market for power is surging. What’s more, margins from renewables (ethanol and power from bagasse) are more than 30 per cent as against 15 per cent for sugar in a normal year. This has proved to be a godsend for companies in the south looking to branch out into other operations to keep afloat. Says M. Manickam, managing director of Coimbatore-based Sakthi Sugars, “The way forward is a balanced portfolio of sugar, alcohol and power, which will enable factories to be profitable and pay farmers a remunerative price.”
Belgaum-based Shree Renuka Sugars (SRSL) has already ditched its sugar focus, has quickly established itself as the largest supplier of fuel ethanol (20 per cent market share) in the country and is on track to transform itself into more of a full-fledged bio-fuel company. After buying ethanol equipment maker KBK in July, the company is increasing ethanol capacity by 15 times to 900 kilo litres per day by 2009, and aims to bring its sugar revenue to 50 per cent. “We are moving towards bio-fuels and bio-energy as demand is booming,” says Narendra M. Murkumbi, managing director of SRSL.
As India’s power requirement continues to surge, a few sugar companies have discovered that co-generation is a perfect way to balance their products and add to their revenue base.
For Instance, until November 2003, Sakthi Sugars was purely a sugar company with its entire revenue coming from sale of the commodity. Now, however, it is installing co-generation facilities in all its factories in the south. It has invested Rs 260 crore for ramping up co-generation capacity from 35 MW to 120 MW. SRSL, too, is increasing co-generation capacity six times to 129 MW. Chennai-based EID Parry, one of the largest sugar producers in the country, is also converting its factories into integrated sugar complexes to de-risk from the cyclical sugar business. The company is setting up a 20-MW co-generation plant at its Pettavaithalai unit in Tamil Nadu, besides putting up distilleries at Pudukottai and Sivaganga to produce value-added products from molasses.
Bannari Amman Sugars, another major player in the south, was perhaps the first to see the virtues of less reliance on sugar. The company built integrated sugar complexes much ahead of its peers. As a result, revenue from sugar constitutes only a little more than 60 per cent of overall income from operations in the first half of the current fiscal.
Moving into the power arena makes sound business sense. Companies can get Rs 3.15 for every unit of electricity they generate. Moreover, soft loans are available under the sugar development fund to encourage co-generation at an attractive 4 per cent interest rate.
So what is the ideal revenue mix for a sugar company in these fast changing times?Typically, the company should get 40 per cent of its business each from sugar and ethanol and about 10 per cent from co-generation. Ideally, a 3,500 tonne of cane crushed per day (tcd) factory should have 20 MW co-generation facility and 50,000 litres per day of distillery capacity.
In some ways, the crisis in sugar has been a positive development — perhaps even a boon — forcing businesses to diversify when they might not have been done so if times were rosier. For this, they have to thank the state governments which ensured farmers very high prices for their crops, resulting in farmers using more land for sugarcane. This caused a huge rise in cane production in the past two years and a closing stock enough to meet consumption for more than six months. “Currently, the Indian sugar industry pays the highest cane price in the world while realising the lowest sugar price,” says P. Ramu Babu, managing director of EID Parry.
North-South Divide
While the southern mills have made headway in dealing with the crisis in innovative ways, the mills in north India seem reluctant or unable to change much with the times.
They are changing but they have been slow and started it much later compared with their southern peers. UP-based mills still get about 90 per cent of their revenues from sugar. While Bajaj Hindusthan, the country’s largest sugar company, gets about 90 per cent of revenues from sugar, Balrampur Chini, another behemoth, derives around 80 per cent from the commodity. The high state advised price (SAP) in UP and lack of diversification are the major reasons for the perilous state of north-based mills.
Still, giants like Bajaj Hindusthan are being forced to change with the times. The company has big plans for co-generation and will sell 90 MW power. Bajaj also wants to further diversify its product line with a foray into making medium density fibre boards and particle boards.
Policy Hurdles
While southern companies remain leagues ahead of their northern counterparts, other problems continue to shackle the industry. In Tamil Nadu, the ethanol programme has not taken off. Though the centre has done away with controls, molasses and alcohol continue to be highly regulated in the state since alcohol is a major revenue earner for the government.
With ethanol allotments not happening and molasses movement remaining regulated, the sugar industry is saddled with high molasses stock and low prices (around Rs 200 per tonne). There are no takers because of the huge oversupply, says an industry official.
The fortunes of the sugar industry seem to be unravelling very much like a Darwinian saga. The death blows of government pricing policies, global competition and inherent volatility in sugar has imperiled the fortunes of Indian firms. While southern companies such as SRSL have adapted nimbly to existing conditions, reinventing themselves as new-energy companies, their northern counterparts are still lumbering to their feet.
However Renuka Sugars has not abandoned its sugar expansion plans:
We intend to consolidate our leadership position in the fuel-ethanol market, when the blending increases to 10%, which the government is planning to introduce shortly. As part of this plan, we have also announced new capex which would take our production capacity to 900 KLPD from 450 KLPD over the next two years.....
also acquired a standalone distillery with a capacity of 100 KLPD which could be expanded to 250 KLPD. The distillery will help the Company in cutting down transportation costs for supply of its Ethanol contracts to the Oil Marketing Companies (OMC) located in coastal States of Goa, Karnataka and Kerala and for export purpose.....
SRSL is setting up a state-of-the-art 2000 tons per day (TPD) port-based refinery in Haldia, West Bengal. This refinery would use raw sugar and convert it into European grade sugar which fetches a premium in the world market. This refinery is strategically placed for servicing domestic and export markets and can operate round the year on combination of domestic and imported raw material. The facility can process up to 700,000 tons of sugar per year.
SRSL announced the setting up of another refinery of 1000 TPD capacity. This refinery would be integrated with its plant in Athani...
Sakthi Sugars
In the Distillery Unit at Sakthinagar, an Ethanol Plant with a capacity to produce 15000 KL of Anhydrous Alcohol has been established in the year 2002..
Sakthi Sugars has set up sugar units in different parts of India:
Sakthinagar unit
Sivaganga unit
Dhenkanal unit
EID Parry
Articulating the vision of the company, Mr. Rama Babu says, “In the long term we must be known as the largest Sugar Company in the country”.
Mr.A Vellayan, vice-chairman, EID, voices the vision for the future, “The whole business model of EID will change in the next couple of years. We want to position it as one of the largest sugar companies. We want to make it an integrated company producing a range of value added products.”
Ethanol India
the sugar industry will not be lacking in meeting the requirement of ethanol. In a market economy, there would be a considerable shift from the gur and khandsari sectors which are inefficient producers with poor quality. In the current scenario of glut in sugar production, it may be advisable to divert such additional cane for the production of alcohol after meeting the sweetener requirement.
