Sugar Industry Analysis

Group 9 Sec B
VIGNESH KP VIJAYABALAJI S SHRIRAMAN S DHINESH BABU D K ASHOK KUMAR S. SHANKAR

INDUSTRY RISK EVALUATION: 1. Demand-supply gap: Rating 3 (Average) Forecasted India production - 6.2 % & Consumption 3.6 % Forecasted World production 4.7 % & Consumption 1.7 %, so there is a supply and demand gap. 2. Government policies: Rating 4 Government regulations allow only 2 MT to be exported. Rise in raw material cane cost is not fully compensated with rise in sugar prices. 3. Extent of Competition: Rating 4 (Average) Market leader Shree Renuga sugars with 20 % market share. Other players have average 8 % market share. Technology and limited access to the raw materials makes a moderate entry barrier. 4. Input Related Risks: Rating 3 Monsoon plays a crucial factor in this as the raw material is seasonal based. Supply of raw material is decreasing 5. ROCE (Return on capital employed) : Rating 1.5 Weighted average ROCE 10.2 % (Capitaline database) 6. OPBDIT/Operating Income: Rating 3 2012 2011 2010 OPBDIT 1444 2909 3588 Operating Income 12740 22983 22573 OPBDIT/Op.Income 11.33 12.65 15.89 7. Growth in operating margins: Rating -1 ( As the operating margin is decreasing throughout the year)
KEY CHARACTERISTICS OF SUGAR INDUSTRY: Government regulated industry: Sugar industry in India is

highly regulated by the government, the Centre decides the limit up to which the mill can sell their produce, quota for free sales and also the levy quota. Up to 20% of the total sugar produce can be exported and these exports are exempted for excise duty and an excise duty of 60% is put on sugar imports. Regulations have also been set on FRP (Fair& remunerative price) and also on reservations of cane area. Fragmented and capital intensive: Shree renuga sugars is the market leader with a 20% share followed by other private and co-operative players having market share not more than 5%.Sugar industry involves setting up of huge sugar refineries and inventories making it more capital intensive. Seasonal fluctuations and geographical spread: Sugarcane production is highly seasonal and dependent on monsoon and geographically production is from TN, Karnataka, Maharashtra, Gujarat and UP RISK FACTORS: There is a demand-supply mismatch in sugar production because farmers are considering alternate crops for more profitability and there is an increase in direct and indirect consumption of sugar. Increase in labor shortages is attributed to closure of mills due of lack or non-availability of good produce. Since sugarcane production is cyclical and due to the perishable nature of raw material the financial returns have been less reliable. Input related risk is high because, Bargaining power of the suppliers is high owning to the fact the millers have to buy from the farmers at the SMP( purchase price) fixed by the government.

PAST PERFORMANCE RECENT DEVELOPMENTS AND TRENDS AND OUTLOOK: The operating margins of the domestic sugar industry were moderate over last five sugar seasons 2006-07 to 2010-11. Margins ranged from a low of around -0.2 per cent in 2006-07 to a high of around 20.3 per cent in 2008-09. However, net margins, RoCE and interest coverage were low primarily due to high debt levels, led by the large capital expenditure witnessed in the industry over the last five years and a surge in cane costs in the last 3 years. On March 30, 2012, the central government permitted domestic sugar mills to sell free sale sugar on a quarterly basis, as against the monthly basis followed up to March 2012. The impact of the current order is expected to be positive for the sugar mills as they will be able to manage their finances better. According to Indian sugar mills association (ISMA) the output for 2012-13 would be 4% lower than that of 2011-12 due to delayed monsoon. The prices would remain stable though as the production is still far beyond the consumption levels. There is higher diversion of Brazilian cane towards ethanol production in 2012-13. This deficit would be compensated by other sugar producing countries including India. The price is expected to increase by 10-12 per cent. Government has announced that it would abolish the quota system for sugar and free its exports by bringing it under the Open General License scheme. Under this scheme, there is no limit on exports of a commodity. This would effectively make sugar exports unrestricted. While the notification for the same has not yet been issued, the government is likely to keep a tab on exports and will restrict it when it reaches a certain level.The outlook for the short term 2012-13 looks positive due to high production levels, global demand & governments permission to sell free sale sugar on a quarterly basis. The medium term outlook 2012-15 would depend majorly on the export policies of the government. The sugar industry is expected to be stable with moderate margins. MAIN LOCATIONS IN INDIA FOR THE INDUSTRY: The trend in the industry is to set up Sugar factories within 25 kms from the Sugarcane farm in order to operate efficiently with leveraged advantage in supply chain. Some of the major locations of the Industry in India are Uttar Pradesh, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The most of the factories in this industry are concentrated in the region of UP. FINANCIAL RISK AND SCORES: The financial risk of the companies in Sugar Industry is evaluated based on Interest coverage, Return on Capital Employed, Current ratio, DSCR, TOL/TNW, Free Cash Flow from Operations/ Total Debt. The total score is computed by assigning 25% weight to ROCE, 25% weightage to Interest coverage and the rest of the 50% weightage is assigned equally to all other parameters. The results are tabulated below.

Q6: We have a capital adequacy ratio of 12.74% and a capital of 1473 Cr. The maximum limit that can be extended to a single company is Rs.220 crores (15% of Capital fund) in compliance with master circular on exposure norms guideline -2.1.1.1 and 2.1.1.2. The objective of the bank is to increase the business to increase to 30% thereby increasing the NIM. RECENT BUSINESS DEVELOPMENT -The US removed tariffs on ethanol imports and ended subsidies for corn-based ethanol. This will spark an increase in Brazil's ethanol exports to the US. Therefore Sugar prices will increase in the medium term giving opportunities in the export market. DALMIA BHARAT SUGAR & INDUSTRIES LTD - The borrowing rate of the company last year was approximately 11% with a net borrowing of 394.12 Cr. Forex transactions of Rs 17 Cr of net imports. They have a working capital requirement of Rs 50.68. They have an opportunity in the export market business expansion. TRIVENI ENGINEERING & INDUSTRIES LTD - The earnings in Forex is 11.03 (Rs in cr). They can be given a LC for forex imports. The working capital advances and cash credit in the past year was around 326.19 (Rs in cr). They have loans of Rs 371 Cr and a cash credit of Rs 230 Cr. Their current bank borrowing cost is 11.59%. SARASWATI SUGAR MILLS They have a borrowing cost 15.89%. They do not have a working capital or cash credit arrangement with banks. There is a window of opportunity in this aspect. RAVALAGAON SUGAR FARM INDUSTRIES They do not have term loans from banks. They have a working and cash credit arrangement for Rs 13 Cr and Rs 3 Cr respectively. Term loans from others of Rs 8.38 Cr at 13.36% interest charges. There is an opportunity for term loans and also percentage in WC arrangements. KOTHARI SUGARS & CHEMICALS LIMITED They have net borrowing interest rate of 14.76% with a bank borrowing of Rs 42.23 Cr. They do not WC or cash credit arrangements with any banks. TRIDENT SUGARS LTD They have a borrowing cost of 16.57% with a net borrowing of Rs 5.57 Cr. They have a bill discount value of Rs 26.77 Cr. We have huge opportunity in term loans as we can afford to lend at 11% (Return on advance 11%). EID Parry India Ltd They have a good market share in the industry. They have a term loan of Rs 43.53 Cr. They are in a forex market of Rs 70 Lakhs. We have opportunities for Forex for sale and purchase. QUANTITATIVE ASPECTS
Latest year data Interest Cover Current (times) IC Rating Ratio CR Rating DSCR DSCR Rating TOL/TNW 1.5798 1.975 0.9852 1.93 -1.36151 2.965 8.4408 0.94 1 1.38 4.5 6.344828 6 1.4 0.7 1 1.72 6 1.85251 3.75 0.74 0.95 1 1.28 3.75 5.417425 6 1.01 1.01 1.5 1.27 3.75 2.031409 3.75 1.85 3.24 4.5 1.57 6 5.295345 6 2.13 1.71 2.25 0.94 1 -0.94595 1 15.97 2.35 3 0.87 1 -1.35091 1 0.7 Linear average of last 3 year data TOL/TNW Rating ROCE 5.16 3.75 0.110215839 5.25 0.095580085 4.5 0.096085 3 0.062104563 2.25 0.066150486 6 0.158672823 5.25 0.211438572 ROCE FCFO/Debt Rating FCFO/Debt (rating) Total Score Rank 1.5 0.364975098 1 0.037316837 1 0.208763492 1 0.138718805 1 0.101902805 3 0.110995685 4.5 0.0700512 5.25 3 3.75 3 3 3 3 3.0625 2.75 2.75 2.3125 3.53125 2.6875 3.15625 11 18 20 29 6 21 10

Company Name Industry Average Ravalgaon Sugar Farm Ltd. Saraswati Sugar Mills Ltd. Triveni Engineering & Inds. Ltd. Dalmia Bharat Sugar & Inds. Ltd. Kothari Sugars & Chemicals Ltd. Trident Sugars Ltd. E I D-Parry (India) Ltd.