There has been a lot of buzz around the Indian sugar industry. It was mostly to do with the general elections and the govt response towards supporting the struggling industry. In order to better understand the sector, I thought of analyzing one the larger company in the sector which is Dhampur Sugar Mills Ltd in my blog ” Dhampur Sugar Mills- Analysis”.
The company was set up in 1933 with a sugarcane crushing capacity of 300TPD at Dhampur and has now reached a capacity of 45,500 TPD having 5 plants spread across Uttar Pradesh, India. Headquartered in Delhi, over the years, Dhampur sugar mills have always tried to increase its operational efficiency as well as keep expanding in both bad or good times to average out the costs.
Dhampur Sugar Mills - Analysis "BUSINESS"
Before analyzing the company, let us understand a few aspects of its nature of business.
In order to extract the maximum sucrose from sugarcane, the turnaround time from cut-to-crush should be minimized. Cut sugarcane rapidly loses sucrose. Dhampur Sugar mills try to do it in 24 hours. And have located its plan strategically to cater to different cane growing regions.
The sugar industry in Uttar Pradesh is at an advantageous position than other Indian states. This is because of the use of a superior variety of cane (Co0238) which is climate & disease resistant as well as give higher yields(higher recovery per quintal of sugarcane). This variety of cane matures earlier compared to the average period of 12-18 months. In addition, the infrastructure is well in place in the state to support the industry.
Also, Drought might not be good for most industry/humanity but for the sugar industry, it acts as a positive. For FY16-17, there was a drought in Karnataka & Maharashtra accompanied by lower global production. Because of which the company had the best ever margins in 2017. Sugar Season 2020 seems to be headed towards a similar direction.
I would suggest you to read the following blogs to get a better understanding of the sector:
Dhampur Sugar Mills- Analysis "PLANTS"
Dhampur Sugar Mills- Analysis "REVENUE"
The company has the following businesses:
1. Sugar- About 70-80% of the revenue of the company comes from sugar business. But in terms of profit, this segment lags the other ones.
Other businesses complementary to the sugar business include:
2. Power: Contributes roughly around 10% of the company’s revenue. Part of power generated are used for captive consumption and rest is sold to state electricity boards.
In addition to the power revenue, Dhampur sugar mills earn roughly around ₹20 cr per annum by selling REC at a minimum price of ₹1500/unit. Renewable energy certificates are awarded to power produced from a renewable source(Bagasse, in this case).
3. Distillery(Ethanol): Contributes roughly around 10% of the company’s revenue
4. Biofertilizer and others: Negligible contribution
Both power & ethanol while contributing a smaller sum to revenue is a major part of the revenue post he ethanol price hikes.
Dhampur Sugar Mills - Branded Business
Dhampur sugar mills launched its branded packaged products in 2000 under the brand name “Dhampure” & “Dhampure Green”.
Also, manufacture and market liquor like whiskey, rum, vodka and gin under the brand names of State House and PM to AM.
The contribution from the branded division are quite small.
Dhampur Sugar Mills- Analysis
Pioneer towards B heavy molasses
While other Sugar mills are taking a more cautious approach towards producing Ethanol from B heavy molasses or Sugarcane juice, Dhampur Sugar is taking a pro-active approach in moving a good amount of production of ethanol (30%) via B-heavy route. As you can observe in the image on the top that because of this Dhampur Sugar mills ethanol margin are lower the peers in the Indian sugar industry. This is due to the use of sugarcane in producing ethanol compared to molasses in C-heavy route(no sugar is made from C heavy molasses). Though the numbers look bad in the short run, the management believes that in the long run they would be benefited via
a) Higher revenue because of producing ethanol via B-heavy molasses
b) Lower inventory of sugar
c)Better working capital management
d) Reduced dependence on Sugar prices
With the utilization of B-heavy molasses, it is expects that co. will have lower bank borrowing since working capital reduces. This is because it takes 18 months to sell sugar compared to 6 months for ethanol.
Dhampur Sugar Mills- Analysis "FINANCIAL ANALYSIS"
Dhampur Sugar Mills- Analysis - "COMPETITORS"
The trend of margins, the sugar recovery rate is quite similar among the larger sugar companies. The small differentiation boils down to :
- Debt– Almost all sugar companies have higher short term borrowing to fund working capital requirement. Among the lower term borrowers are Dwarikesh Sugar, Balrampur Chini mills. Dhampur Sugar or the other similar players such as Avadh Sugar have slightly more debt but at an comfortable servicing level.
- Low-cost production: Among low-cost producer, Dwarikesh Sugar is the best placed with a sugar recovery rate of 11.88%(FY18). Dhampur’s stand at 11.3%.
- Ethanol capacity: At present, Dhampur has the largest ethanol capacity at 400KLPD followed by Shree Renuka & Balrampur Chini(360KLPD).
- Integrated production: Since all the raw material in the entire value chain are perishable and involves a larger logistics cost, plants need to be integrated in terms of making ethanol and for power generation.
Dhampur Sugar Mills- Analysis "EQUITY"
A couple of months back, Dhampur sugar mills have announced share buyback of 3.69% of the total equity of the company. The buyback price was fixed at ₹175 per share.
The company has been issuing new shares quite consistently via issuing warrant or qualified institutional placements(QIP), thus diluting the shareholders.
Dhampur Sugar Mills- Analysis "SUBSIDIARIES"
The company has 3 subsidiaries but the size of them are minuscule to have any material impact on the parent company.
Dhampur Sugar Mills- Analysis "VALUATIONS"
Given the cyclical & commodity nature of the business coupled with the tight regulatory controls, the sector, in general, have a low valuation. In the case of Dhampur Sugar Mills, it the Price to earnings ratio stands at 5 and Price to Sales ratio stands at just 0.4.