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Sugar: 'Power' for real? - Views on News from Equitymaster
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  • Jul 16, 2004

    Sugar: 'Power' for real?

    Sugar stocks have been hogging the limelight over the past couple of months. The activity further intensified post-budget, as the government's agricultural focus is also likely to benefit the industry. Although, the sugar industry did not witness anything in particular during the budget, the presence of the agricultural minister (from the sugar belt) has led to favourable sentiment among the investors. However, lately there have been some noises that sugar companies could probably add to the power generation capacity of the country. We decided to investigate this.

    On an average, 100 tonnes of sugarcane yield 9.5 tonnes of sugar, 3.3 tonnes of bagasse, 3.5 to 4 tonnes of molasses, 3-4 tonnes of press mud and 0.3 tonnes of furnace ash. The most important of these by-products is molasses and bagasse. Molasses is used for production of ethanol, which in turn is used for the production of potable liquor and is blended in petrol. On the other hand, Bagasse is a voluminous waste product left after the crushing and extraction of juice from sugarcane. It is used as a fuel in the furnace for the generation of steam. The generated steam, in turn, is used for power generation. The above process is called co-generation.

    In other sugar-producing countries such as Brazil and Thailand, the by-products are effectively used by the sugar industry. Co-generation activities are highly encouraged in these countries. The question is, why is this not the case in India?

    In India, less than 40 sugar mills have co-generation facilities and these too have restricted the capacity of power generation to meet their internal requirements. The main reason for this till now has been that even if the sugar mills generate excess power, using bagasse, the excess power would have to be sold to the state electricity boards (SEBs). However, the SEBs have a dismal financial record with huge losses and further, most SEBs are unable to pay for the power they purchase. Unsure of the payments, the sugar mills were reluctant to look at this alternative.

    The recent Electricity Act however, is an opportunity, as it allows private power producers to sell electricity directly to bulk buyers, by-passing the SEBs. This move could be an opportunity for the sugar industry to evaluate the dynamics of power generation, as finding a bulk buyer will not be a problem in a country, which faces energy deficit of around 10% on an average. The co-generation capacity, using bagasse, in India, as of March 2003, was 200 MW, while the potential in co-generation segment is estimated to be 3,500 to 4,000 MW with the current sugar production capacities.

    The government has realized the immense potential of the sugar industry in tackling the energy deficit problem and has therefore extended financial assistance through financial institutions such as Rural Electrification Corporation Ltd. (REC) and Housing and Urban Development Corporation Ltd (HUDCO). Besides, the sugar mills can also borrow from the SDF (sugar development fund).

    However, if the sugar industry were to contribute to the power generation capacity of the country by way of direct sales to consumers, various factors such as cost of generation, transmission and distribution factors have to be considered. Although there is immense scope in the business, most of the sugar mills are not in a position to capitalize on the opportunity given their sub-optimal size. The sugar industry is likely to witness consolidation in the years to come. In that scenario, power production from this industry as a by-product could become viable. But nothing major is likely to come over the next 2-3 years. So, it is advisable not to read too much into it. If you are buying sugar stocks, buy them for inherent strengths and not for 'power' stories like these.



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