It is indeed a sad state of affairs that even after 57 long years of being in existence; the company is unable to come up trumps in its operations
Sugar industry shenanigans
Trying to make sense of the working of the sugar industry is a mug's game given the background of its operations. Sugar is both state and central government centric. Since sugar is a key constituent of the WPI and the CPI price indices constitution, it is a political hot potato too--given its usage characteristics. Sugar is also known as white gold as it has created prosperity and riches in areas where it is grown over vast acreages-Brazil, The West Indies, Mauritius, Western UP and Western Maharashtra for example -- over time. The gooey brown coloured offshoot of sugar cane juice is called molasses which is the primary base material of potable alcohol, industrial alcohol and ethanol-the latter is used to blend with petrol and produce a concoction called gasohol. Potable alcohol, in turn, on processing becomes an IMFL (Indian made foreign liquor) product. Almost all IMFL products in India use potable alcohol as the base to make hard liquor. And wherever there is sugar and alcohol there is a heady mix of politics thrown in. Industrial alcohol in turn is the raw material base to make plastics and chemicals.
The price paid for sugarcane to the farmer is based on the quantity of sugar produced from cane. The price to be paid for the cane is decided both by the central government and the state government-with the state government having the upper hand as it recommends a higher price payable to the farmer. The price recommended by the Central government is called the 'fair and remunerative price' (FRP) and is based on an average recovery of sugar of 9.5% by weight of the cane crushed. Ditto with the state government too; except that in this instance it is called the 'state advised price' (SAP). This is only the beginning of the many catch me if you can commandments. Then there are the laws that govern the sale of potable alcohol, industrial alcohol and the like. Here too it is the diktat of the state government that comes into play on the pricing of the alcohol, on the quantity which can be sold to various industrial sectors, and on the cross border sale of alcohol. (Liquor is a state addressed subject). Then there is the levy sugar quota-- which I think is still extent-- and the periodic free market releases based on the open market prices as ordered by the government. As I understand it currently sugar producers have to sell 10% of their sugar production at a perfunctory price fixed by the government. This infers that the more sugarcane you crush the higher the losses on sugar sales! It is a virtual jungle out there. Still, the interesting point is that there is no dearth of entrepreneurs in this industry. Obviously, just about everybody who is directly and indirectly concerned with the functioning of this industry is a beneficiary in this complex poker game.
A small sized sugar unit
Thiru Arooram Sugars is a Tamil Nadu based sugar unit with two factories in operation -in Thanjavur district and in Cuddalore district. It has the benefit of the sugar unit and a distillery unit-all sugar factories come with both the sugar and the distillery units. The company crushed 1.23 m metrictons of cane during the 12 month period against 1.6 mmetric tons in the preceding 15 months. The company states that the sugar recovery was marginally lower at 8.96% as against 9.11% in the previous year. (This point is crucial). But, inspite of higher sugar production, a higher recovery rate of sugar, and an accounting period extending to 15 months in the preceding year, the company reported a higher pre-tax profit of Rs 48 m in the current year as against Rs 6 m previously. This is the very paradox of the sugar industry.
There are some interesting sugar industry statistics to go by as flashed in the latest annual report. The total world sugar production in 2012-13 amounted to 180 m metric tons. India's production was 24.6 m metric tons or 13.6% of the total. The country's share was marginally down from 15% in 2011-12. The company in turn produced 0.10 m metric tons or 0.41 % of the total Indian production. The company is a lilliput in the overall Indian sugar production scenario.
The financial working results for the latest year are for a 12 month period while the statement of account for the preceding year is for the extended periodof 15 months, and hence the revenue figures for the two years are not strictly comparable, while the year end financials are - as the latter figure represents a composite. It does not make for a very pretty picture at all. The company earned revenues of Rs 3.4 bn from the sales of its mainline products-sugar and alcohol, and a smattering of an income from the sales of bio-compost and from pressmud (the residue of the filtration of sugar cane juice).Then there is the income from 'other operating revenues' of Rs 75 m-which arises mainly from raw sugar processing charges amounting to Rs 32 m against NIL previously, duty drawback on export of sugar, and from scrap sale. It also sells some paddy. To round out the picture there is 'other income' of Rs 47 m arising mainly from the net gain on forex transactions amounting to Rs 44 m, and including piddling sums from the profit on sale of assets, and interest on bank deposits etc. Its sizeable investment portfolio in core assets is also a monetary dud so to speak.
The important point to note here is that the pre-tax profit amounted to Rs 48 m and is exactly equal to the amount of 'other income' that it generated. In the preceding year the picture was even more bizarre --the pre-tax profit amounted to Rs 6 m and the other income toted up to Rs 36 m. (The accounting period in the preceding year was apparently deliberately lengthened by three months to hide what may have otherwise been a whacking loss). Equally important to note is that the constituents of 'other operating income' vary each year. In the latest year, the two biggest constituents are raw sugar processing charges, and duty drawback on export of sugar. In the preceding year the two biggest items are sundry receipts and scrap sale. In other words there is consistency in inconsistency. In the other income schedule there is unanimity - the biggest constituent by far in either year is the 'net gain on forex transactions'. The company seems to have developed quite some expertise here. For the matter of record the company exported sugar valued at Rs 1.6 bn against exports of Rs 2.4 bn previously. The value of sugar exported amounted to 52% of all rupee sugar sales against 45% previously. Presumably, the management had the welfare of the company in mind when it decided to export sugar on this scale.
Little to show
But at the end of the day it has nothing to show for its troubles. The problem is that the input cost of materials is prohibitive, leaving no room to accommodate other expenses. In the preceding year the cost of materials consumed amounted to 79% of net revenues from operations against a lower 70% in the current year. With employee expenses, finance costs, and depreciation etc to be taken care of there is very little left in the kitty at the end of the day.
It is some sort of a touch and go operation. The debt has accelerated to Rs 1.9 bn during the year against a debt burden of Rs 1.64 bn previously. There is also the heavy burden of fixed assets to be serviced. The gross block at year end of Rs 3.56 bn could only generate revenues net of excise of Rs 3.43 bn. This will obviously reflect on the financial performance. The non- current investments have a book value of Rs 1.1 bn and do not yield any dividend returns. The investments are concentrated in one sibling and in one associate company. The sibling Terra Energy generates power from bagasse supplied by the parent, and in turn it supplies some of the power generated back to the parent. The sibling also sponges off the parent through loans that it has availed of-loans of Rs 231 m at year end against Rs 73 m previously. It is not known whether this loan is interest bearing or not. Paradoxically, the parent has also availed of a deposit from Terra Energy amounting to Rs 200 m at year end. It is difficult to make any sense of all this. The parent however pays interest at market rates to the sibling for this deposit.
The associate company, Shree Ambica Sugars Ltd in which the parent has an equity stake of Rs 702 m (the shares were acquired at an average price of Rs 40 per share on a face value of Rs 10 each) is also linked to the parent. The parent buys sugar from the associate for resale, and in turn sells sugar to it. Presumably the parent knows what it is doing. Just to round out the picture the parent also processes sugar for its associate. This associate pays no dividends to the parent. But the show goes on nevertheless. This company is a closely held one.
The level of the borrowings that the company avails of depends mostly on the inventory levels that it has to carry. In the preceding 15 month period the level of inventories fell by Rs 1.22 bn while for the latest year end it was up by Rs 753 m. The level of borrowings reflects this trend. As a matter of fact the inventories at year end amounted to 56% of net revenues from operations during the year. It would appear that sugar units are deliberately exempt from the need to monitor the market forces of demand and supply or make use of any other sane economic judgement, and to crush whatever sugarcane is made available to them for crushing. The level of borrowings that the company has to service is also a factor of the low owned capital base. The share capital amounts to a mere Rs 113 m on a total asset base of Rs 7.6 bn-the management holds a comfortable 61.3% of this paid up capital. It is another matter that the reserves and surplus amounts to Rs 1.3 bn. The Chairman and Managing Director is R V Tyagarajan.
Fortunately for the company it is able to literally sell cash down for what it puts out in the market for sale-the trade receivables amount to Rs 201 m, while it gets a sizeable breather to pay for what it purchases--trade payables of Rs 1.1 bn. The latter effect implies that farmers have to wait for their payments. It also made an attempt to reduce interest costs somewhat by maintaining a year end current assets figure which is lower than that of the current liabilities.
The parent has furnished the detailed financials of its sibling -Terra Energy Ltd. This company has a paid up capital base of Rs 310 m. The cost price in the books of the parent amounts to Rs 360 m for a 66.2% share in Terra, as the stake was acquired at a premium to the face value. Why it chose to acquire the shares at a premium is not known-not that it makes any earthly difference though. More than 50% of its reserves and surplus of Rs 504 m is also made up of the share premium variety. The company has borrowings of Rs 400 m at year-end against a debt of Rs 490 m previously. The borrowings include interest free loans of Rs 150 m from other sources. The loan availed of from the parent of Rs 231m does not appear to be showing up in its balance sheet!
The sibling rustled up 'revenues from operations' of Rs 334 m during the latest accounting year ended March 2013. This revenue includes sale of power of Rs 243 m to other entities, another sale of power to Thiru Arooram Sugar of Rs 82 m, and sale of bagasse of Rs 7 m. There are also sundry other operating revenues amounting to tidbits. But the big mover here is 'other income' of Rs 45 m, consisting in the main, of interest receipts of Rs 33 m on loans advanced to the parent. Juxtapose this receipt with the pre-tax profit of Rs 38 m. Like the parent it makes ends meet at the end of the day from its other income. This does not appear to be a company that is run as a business proposition. Consider the following aspects. The trade receivables at year end amount to Rs 462 m. This amount is significantly more than the revenues from that it garnered from operations during the year! Not surprisingly some 70% of the receivables are outstanding for a period in excess of six months. Trade payables in turn amount to Rs 157 m. The total purchases on revenue account for the year amounts to Rs 84 m. What exactly is the game plan here is not very clearly evident. But, atleast, the company is turning a profit at the end of the year, and the year end debt is also lower.
At the end of the analysis there is very little to recommend in this scrip as the company appears to be run more for the benefit of the promoter shareholders.
P.S. The Company also has large sums in disputed liabilities under appeal both on account of direct taxes and indirect taxes
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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