The performance of sugar companies, like the proverbial curate's egg, is good in parts
Diversified but still under the yoke of sugar
Originally a member of the Sakthi group of Coimbatore founded by the visionary N Mahalingam, this company appears to have been spun off from the group. Apart from Sakthi Sugars there is Sri Chamundeswari Sugars which is still a part of the group. The board of Bannari Amman Sugars is presently chaired by Mr. SV Balasubramaniam-who also personally owns 9.2% of the voting stock. This company boasts of nine enterprises over which key management personnel are able to exercise significant influence. The list includes one sugar unit, Madras Sugars Ltd, and one distillery unit, Shiva Distillers Ltd. The latter incidentally owns a 34.5% stake in Bannari Amman. According to the latest update, the promoter group collectively controls 54.7% of the outstanding stock of 11.44 m shares of Rs 10 each - amounting to Rs 114 m. The promoters are also well remunerated for their troubles. The managerial remuneration schedule shows that the remuneration to the top bosses at Rs 69 m accounted for over 13% of all employee remuneration.
The company it may be noted is a fairly late entrant in the world of India Inc having commenced its corporate existence in 1985. It presently makes do with a number of plant locations in the two states of Tamil Nadu and Karnataka. There are two sugar units each in Karnataka and Tamil Nadu, a distillery unit each in the two states, one bio-compost plant in each state, and windmill units in Tamil Nadu.
A healthy balance sheet
Inspite of the many man-made and nature induced impediments that sugar units (white gold if you may) have to operate under, the company makes do with a healthy balance sheet - what with reserves and surplus at Rs 8 bn, which towers over the paid up capital. (Over 86% of these reserves constitute general reserves or unappropriated balances). The management also makes do with a very conservative dividend payout policy. The 100% dividend that it declared for the latest accounting year amounting to Rs 133 m, including dividend tax, accounted for a mere 12.5% of the net post tax profit for the year. However, the picture in the preceding year was drastically altered. The same percentage dividend in this instance accounted for 25% of the post tax profit - but that was because the post tax profits took a severe drubbing. The company also carried debt to the tune of Rs 5 bn (Rs 5.2 bn previously) in its books - but that is only due to the heavy inventory baggage that it carries at year end. The value of inventories stood at Rs 6.1 bn against Rs 5.3 bn previously. It may also be noted that the company is also very fixed assets heavy. The gross block at year end tuned in at Rs 11.4 bn against Rs 11 bn previously - thus outputting a very low fixed asset to turnover ratio. And inspite of the many uncertainties that clouds it's working, or because of this factor, the share price oscillated dramatically during the financial year - from a high of Rs 725 to a low of Rs 469.
In their report to the shareholders, the directors make out that India is the second largest sugar producer, but the largest consumer of sugar in the world. According to the estimates of the International Sugar Association, the world sugar production amounted to 173 m tonnes in the Oct-Sep 2011-12 sugar season. The Indian sugar production in this season is estimated at 26 m tonnes. In other words this production amounted to 15% of the total world production. Ranking in at No. 2 with only 15% of the total production appears to be a bit skewed on the face of it. More importantly, some 50 m farmers and their dependants are involved in this industry.
Earning its bread
The company earns its sugar loaf through the sale of a variety of products some of which are interlinked. It has made more than impressive gains on the revenue front in the last five years. From a turnover of Rs 6.1 bn in 2007-08 the turnover excluding other income, more than doubled to Rs 12.6 bn four years down the line. The contribution of 'other income' declined very sharply over this period. Such income hit a high of Rs 218 m in 2007-08 and touched a low of Rs 32 m in the latest accounting year. So, this is not a line of cash flow which can be counted on to beef up the bottom-line. And inspite of a sharp spike in interest and depreciation costs, the pre-tax profit moved up even more smartly - though there were severe ups and downs in this aspect in the interim. Thus, giving a percentage increase in profits would not be in order. For example, it recorded its highest pre-tax profit of Rs 2 bn in 2009-10, and then recorded its second lowest pre-tax profit of Rs 561 m for the five year period in the very next year. But given the low capital base it had no difficulty in paying a 100% dividend in the latter four years.
For segment information purposes it has earmarked the revenues under four heads-sugar, power, distillery and unallocated. In the schedule of revenue from operations the revenues are grouped under six heads for in-house manufacture/processing - sugar, molasses, granite products, industrial alcohol, bio-compost, and power. There are minor incomes from by-products too. It also sells traded goods - sugar, granite, and fertilizer & chemicals valued at a lilliput Rs 48 m, and their contribution to the bottom-line is indeterminate. What is important to note here is that the recovery of sugar from sugar cane crushed was as high as 11% in some of the units-but this recovery is almost the same as in the preceding year. The revenue from sugar sales accounted for 75% of gross revenues during the year- and hence the fortunes of this company is inextricably linked to the amount of sugar cane that it crushes, to the percentage recovery of sugar, the price that it has to shell out for the sugar cane, and what the company is able to realise on the sale of both levy sugar and free sale sugar. A very complex exercise in every sense of the word if one may say so. It also bought and sold miniscule quantities of sugar.
The production of sugar leads to several bye-products -molasses, and bagasse. Molasses can be sold as it is, or processed into potable alcohol (rectified spirit) or into industrial alcohol (denatured spirit). The former is used to make alcoholic products, while the latter is used to make chemicals, pharma products, of even LDPE, HDPE and the like. Bannari Amman is content with selling molasses and industrial alcohol. Apparently it converts some of the molasses into alcohol before selling and sells the balance as molasses. Each one to its own I guess. The sale of molasses and industrial alcohol together rang in sales of Rs 1 bn. The bagasse or chaff is used to generate power, and the company generates quite some power at that. Power sales are the second largest item on the agenda accounting for Rs 1.2 bn in gate receipts. It also mines and processes granite. Granite sales brought in a cash flow of Rs 625 m. Where granite sales fit in into the overall scheme of things is not known but apparently the company has figured out a way to fit it in. Apparently the company sees it as some sort of a flanking move or some such-to take care of the vagaries of the sugar biz. If so it must rank as some flanking move! The smallest contributor to the top-line 'in-house' sales is bio-compost at Rs 31 m. Then there are sundry other items of operating income including export incentives, and carbon credit sales income which aggregate to another Rs 46 m. This appears to be a tricky head of income and subject to assorted vagaries.
The cash flow generation
So where does the bottom-line cash flow come in from? For segment information purposes the company has bifurcated its sales under four heads of account-sugar, power, distillery and unallocated. Sugar made money in the current year, but it lost money in the preceding year-just like that! Sugar also accounts for the vast bulk of the segmental assets. Power is the largest contributor based on profit on sales and on the return on segmental assets. The distillery unit is also a very profitable operation based on the same parameters. The unallocated segment--probably referring to the granite unit, fertilizers, and sundry other product lines -- also contributed to the cash flow at the end of the day. In the preceding year this segment ran on a no-profit no-loss basis. But it managed a substantial turnaround in the bottom-line in the latter year.
As I had stated earlier the biggest bugbear that it has to contend with is in the volume of finished goods stocks that it has to contend with. The value of closing stocks at year end at Rs 6.12 bn is equal to a little over 50% of the gross revenues from operations for the year. Over 87% of this holding value is made up of finished sugar. Does it possibly denote the inability of the company to read market demand accurately, or is the company holding on to the sugar stocks in a bid to realise a higher price when the market conditions improve? If it is any consolation, the value of stocks on hand at the preceding year end amounted to 63% of the revenues from operations for that year. This smudgy situation would appear to be an annual feature or something. What is equally perplexing is the interest payout on borrowings that it has debited to the P&L account. In 2010-11 it debited interest charges of Rs 232 m, against a substantially larger sum of Rs 508 m debited in the current year. But the level of borrowings in the preceding year end was higher at Rs 5.2 bn against Rs 5 bn in the current year, and they are mostly classified as cash credit or short term loan. Probably the borrowings at year end refer to the requirement of seasonal borrowings, and are not indicative of the borrowings for the full year or some such. In any event it is difficult to make any sense of such operational parameters.
Excellent working capital parameters
But in terms of other working capital parameters the company is on a strong footing. The company is almost able to sell cash down, while the trade payables at year end is almost on par with the trade receivables - which helps to further cut down on working capital costs. The current liabilities are however lower than the current assets- including the cash in hand by almost Rs 1.7 bn. Though it possesses nine group companies, it has no trade investments which should imply that there are no loans and advances to group companies. The company has however accounted for an interest income of Rs 11 m from loans and advances-though the Loans and Advances schedule does not show any interest bearing advances. And it still holds shares in companies which belong to the original group - Sakthi Finance - at an acquisition price of Rs 3 m. The shares were acquired at an average cost price of Rs 35.6 per share on a face value of Rs 10. It has miniscule amounts in non trade investments - and for some reason these investments are almost fully provided for. This includes an investment of Rs 15 m in a paper unit - Servalakshmi Paper--acquired at an average price of Rs 29 per share on a face value of Rs 10 per share. This investment is not classified as a part of the group structure.
The cash flow statement schedule shows that the company is indeed generating more than enough funds from operations for its sustenance. The funds are sufficient to meet the needs of its fixed asset expansion. But it also led to a very peculiar situation during the course of the year. The high interest outflow and the need to maintain the dividend payment meant that the company had to borrow on capital account to meet its requirement of funds on revenue account! It also explains at one go why the management is quite stingy when it comes to rewarding its shareholders.
Sugar company shares - including the diversified variety - will never rank among the investment grade. Sugar company shares fit into ones trading portfolio. This company is no less.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
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