SUGAR
Sweet Options
To survive a glut in cane crop, the sugar industry diversifies
M. ALLIRAJAN
18 Jan 2008
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| ILLUSTRATION: ANTHONY LAWRENCE |
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Two years ago, being a sugar company in india was a sweet proposition. Global prices for sugar were going through the roof, demand was strong and the monsoons were plentiful and on time, assuring record crops of sugarcane.
It seemed improbable that this fairy tale for sugar producers would last, and it did not. In the last two years, prices have collapsed due to a global glut. From being one of the world leaders in sugar production, along with Brazil, the Indian industry has deeply imperiled itself due to faulty government policies and an inherent inflexibility to diversify.
Still, while sugar companies in the north of India, specifically Uttar Pradesh, are struggling to survive, a whole new transformation is taking place in the south of India as companies are exhibiting a Darwinian ability to adapt, morph and survive by exploring different product mixes and alternate sources of revenue. So much so that many of these are looking less like traditional sugar companies and more like alternate energy companies of the future.
Sugar Isn’t The Only Sweetener
Sugar has proved itself to be a volatile commodity with regular boom and bust cycles. Moreover, while sugar is growing at a measly 3-4 per cent, the demand for ethanol has virtually doubled in the past year and the market for power is surging. What’s more, margins from renewables (ethanol and power from bagasse) are more than 30 per cent as against 15 per cent for sugar in a normal year. This has proved to be a godsend for companies in the south looking to branch out into other operations to keep afloat. Says M. Manickam, managing director of Coimbatore-based Sakthi Sugars, “The way forward is a balanced portfolio of sugar, alcohol and power, which will enable factories to be profitable and pay farmers a remunerative price.”
Belgaum-based Shree Renuka Sugars (SRSL) has already ditched its sugar focus, has quickly established itself as the largest supplier of fuel ethanol (20 per cent market share) in the country and is on track to transform itself into more of a full-fledged bio-fuel company. After buying ethanol equipment maker KBK in July, the company is increasing ethanol capacity by 15 times to 900 kilo litres per day by 2009, and aims to bring its sugar revenue to 50 per cent. “We are moving towards bio-fuels and bio-energy as demand is booming,” says Narendra M. Murkumbi, managing director of SRSL.
As India’s power requirement continues to surge, a few sugar companies have discovered that co-generation is a perfect way to balance their products and add to their revenue base.
For Instance, until November 2003, Sakthi Sugars was purely a sugar company with its entire revenue coming from sale of the commodity. Now, however, it is installing co-generation facilities in all its factories in the south. It has invested Rs 260 crore for ramping up co-generation capacity from 35 MW to 120 MW.
SRSL, too, is increasing co-generation capacity six times to 129 MW. Chennai-based EID Parry, one of the largest sugar producers in the country, is also converting its factories into integrated sugar complexes to de-risk from the cyclical sugar business. The company is setting up a 20-MW co-generation plant at its Pettavaithalai unit in Tamil Nadu, besides putting up distilleries at Pudukottai and Sivaganga to produce value-added products from molasses.
Bannari Amman Sugars, another major player in the south, was perhaps the first to see the virtues of less reliance on sugar. The company built integrated sugar complexes much ahead of its peers. As a result, revenue from sugar constitutes only a little more than 60 per cent of overall income from operations in the first half of the current fiscal.
Moving into the power arena makes sound business sense. Companies can get Rs 3.15 for every unit of electricity they generate. Moreover, soft loans are available under the sugar development fund to encourage co-generation at an attractive 4 per cent interest rate.
So what is the ideal revenue mix for a sugar company in these fast changing times?
Typically, the company should get 40 per cent of its business each from sugar and ethanol and about 10 per cent from co-generation.
Ideally, a 3,500 tonne of cane crushed per day (tcd) factory should have 20 MW co-generation facility and 50,000 litres per day of distillery capacity.
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