North-South Divide
While the southern mills have made headway in dealing with the crisis in innovative ways, the mills in north India seem reluctant or unable to change much with the times. They are changing but they have been slow and started it much later compared with their southern peers. UP-based mills still get about 90 per cent of their revenues from sugar (see ‘More Sugar Than Spice’ on page 72). While Bajaj Hindusthan, the country’s largest sugar company, gets about 90 per cent of revenues from sugar, Balrampur Chini, another behemoth, derives around 80 per cent from the commodity.
The high state advised price (SAP) in UP and lack of diversification are the major reasons for the perilous state of north-based mills. The SAP in Tamil Nadu for the 2007-08 season linked to a sugar recovery of 9 per cent is Rs 1,034 a tonne but in UP it was fixed at Rs 1,300.

The SAP at Rs 1,300 brings the cost of sugarcane to Rs 13.60 per kg at 9.6 per cent recovery (excluding purchase tax, society commission and transport). This is higher than the price of sugar itself — Rs 12.50 per kg. As a result, sugar mills owe around Rs 1,400 crore as arrears to the farmers. The court has reduced the SAP to Rs 1,100, but the damage has been done.

Mills in the south also get to crush cane for more than 200 days compared with about 160-180 days in UP. “Companies based in the north are focusing more on exports and have not diversified much,” says Amol Tilak, research analyst at Kotak Commodity Services.

Apart from diversification, southern mills have several added advantages. The major factors include higher recovery rates, statutory minimum price (Rs 81 per quintal) and lower SAP in places that follow the latter as price fixing mechanism and diversification. The average recovery, for instance, is about 9-10 per cent in Uttar Pradesh while it is significantly higher at 12-13 per cent in southern states and in Maharashtra. In other words, a tonne of sugarcane yields 1.3 quintals of sugar in these areas but UP mills produce only around 100 kg.

Still, giants like Bajaj Hindusthan are being forced to change with the times. The company has big plans for co-generation and will sell 90 MW power. Bajaj

also wants to further diversify its product line with a foray into making medium density fibre boards and particle boards.

“A big shift towards non-sugar is happening this year,” says Rakesh Bhartia, CEO of Bajaj Hindusthan. The company is investing Rs 250 crore for the 2.1 lakh cubic metre boards foray, which would provide a stable revenue stream of about Rs 300 crore. “There is a huge demand for boards, which is being met through imports,” says Bhartia.

Despite these efforts, Bajaj has a long way to go. It will realise only around 15 per cent of its revenues from non-sugar businesses in 2008-09. Its cross-state rival Balrampur Chini, however, has increased distillery and co-generation capacities considerably in recent times. The company is establishing a host of integrated sugar complexes in UP. Though the company has made a decent start, it has a lot to do in order to attain that ideal revenue mix.

Policy Hurdles
While southern companies remain leagues ahead of their northern counterparts, other problems continue to shackle the industry. In Tamil Nadu, the ethanol programme has not taken off. Though the centre has done away with controls, molasses and alcohol continue to be highly regulated in the state since alcohol is a major revenue earner for the government.

With ethanol allotments not happening and molasses movement remaining regulated, the sugar industry is saddled with high molasses stock and low prices (around Rs 200 per tonne). There are no takers because of the huge oversupply, says an industry official.

The fortunes of the sugar industry seem to be unravelling very much like a Darwinian saga. The death blows of government pricing policies, global competition and inherent volatility in sugar has imperiled the fortunes of Indian firms. While southern companies such as SRSL have adapted nimbly to existing conditions, reinventing themselves as new-energy companies, their northern counterparts are still lumbering to their feet.

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(Businessworld Issue 15 January - 21 January 2008)