R Balakrishnan
'Family agreements cannot over-ride national priorities'
In a new twist to the gas dispute between Ambani brothers, the Fertilizer Ministry Monday said private family agreements cannot over-ride national priorities, reports PTI.

Urea plants had been given the first priority in sale of natural gas from Reliance Industries' D6 but the Bombay High Court had upheld the Ambani family, giving 70% of the initial volumes from the fields to Anil Ambani Group's RNRL. "The gas in question has been allocated (to fertilizer, power and other sectors) based on the Government's authority and rights under the Production Sharing Contract (for D6) aimed at regulating gas marketing and allowing their orderly growth," Fertilizer Secretary Atul Chaturvedi wrote to his counterpart in the Petroleum Ministry, RS Pandey, on 24th June.

"Our understanding is that any family settlement would not over-ride the sovereign right of Government to formulate policies aimed at larger public interest," he wrote.

When contacted, Pandey acknowledged receipt of the letter and said "they have raised an issue which will need to be examined".

"In this context, implications of the judgement will have to be legally examined," he said.

Twelve urea manufacturing companies were allocated 14.97 million cubic meters per day (mmcmd) when the government prioritised sale of the initial 40 mmcmd from D6 primarily between fertilizer and power companies based on national priority of food security and meeting energy deficit.

But the Bombay High Court on 15th June ruled that RIL should honour its commitment in the family split agreement and supply 28 mmcmd gas to RNRL. "If such a private arrangement has implications on already signed Gas Sales and Purchase Agreements for the allocated gas and if the existing rights of fertilizer companies are altered to their disadvantage, I am afraid they may also seek available legal remedies independently," Chaturvedi wrote.

He sought a re-confirmation from the Petroleum Ministry that "existing gas allocation, its price and GSPAs would remain intact."

The fertilizer industry, he said, had sought a re-confirmation to the effect that the recent Bombay High Court judgement would have no implications on the supply of gas from KG basin.

"The clarification/re-confirmation in this regard will remove the uncertainty in supply of feedstock to the fertilizer industry.

"This would also have implications on the fuel oil and naphtha based urea units, which are making large investments to switch feedstock to natural gas as per the declared policy of the government," he wrote.

Chaturvedi said the fertilizer industry was allocated about 15 mmcmd of gas from D6 as first priority under the Gas Priority Utilisation Policy of the Government.


5 Cheap Sugar Stocks
One of the sectors that has performed exceptionally well through the bear market is the sugar sector (see chart), and is going to do even better. This is simply because sugar supply is going to fall far more short of demand than was forecast earlier. Kingsman, a consultancy firm for sugar and ethanol, has raised its estimate of global sugar deficit from 2.5 million tonnes to 4.5 million tonnes for the year ending March 2010. This can be attributed to the declining production in India and strong consumption in India and China. Indian farmers have diverted their land to more profitable crops in the last season when global surplus drove sugar prices down. They have also been put off by the scrap between sugar companies and UP (Uttar Pradesh) politicians who insisted on a unreasonably high minimum support price last season.

The global shortfall in sugar is so severe that even a better-than-expected production in Brazil has not helped to improve the situation. Brazil will produce 31.2 million tonnes of sugar in the current April-November harvest, up from 26.7 million tonnes a year earlier. However, most of its sugarcane is used for ethanol production. Approximately, 33% of the total crushing capacity in Brazil has no diversification facility – they cannot switch over to sugar production from ethanol.

Besides, Brazil cannot increase its sugar output as its sugar mills are operating at full capacity. Kingsman says that the price of sugar now depends on how much India will import in the coming weeks and months. India has contracted for about two million tonnes of raw sugar since February 2009. Raw sugar production in India is expected to fall to 14.8 million tonnes in the 2008-09 season from 26.5 million tonnes a year earlier. This is because of lower acreage for sugarcane, which has shrunk from 2.85 million hectares in 2007-08 to 2.14 million hectares in 2008-09, as per the Indian Sugar Mills Association.

To mitigate the shortage, the government has also allowed the mills to free import of raw sugar under the advance licence scheme and export it as refined sugar. The government has also allowed companies to import raw sugar under open general licence, which means that they don’t have any export obligation. However, State-owned firms, which were importing sugar from February following the zero-duty sugar import order, have stopped buying more sugar because of rising global prices. Will higher sugar prices encourage farmers to increase sugarcane production? More remunerative prices and shorter cycles in other crops and lower input cost may restrict farmers’ interest in sugarcane. Cane is harvested after 12-14 months from the time of plantation and farmers get paid 13-15 months after cultivation. So, farmers are likely to switch to shorter-duration crops. The rise in acreage will not be enough to increase the production, which has been estimated at 20 million metric tonnes by the Indian Sugar Mills Association for 2009-10, while the demand will be 21 million metric tonnes.

India will have to import sugar for 2009-10 also. It has started importing sugar this year, for the first time since the 2005-06 season. Currently, sugar is in the range of Rs26-Rs27/kg while it was available at Rs18-Rs23/kg in October 2008. Price is expected to go higher as the sugar shortage will continue into the next year. Given this bullish scenario, here are five of the cheapest sugar stocks. They are not the best companies. Among the finest sugar companies is Shree Renuka Sugars, but it is the most expensive stock.

Upper Ganges Sugar & Industries has three sugar mills, one distillery and two co-generation power plants. This company from the KK Birla group was the first to import 25,000 tonnes of raw sugar when the duty on it was abolished in February 2009. The raw sugar was contracted at $250-$255/tonne, which was way below what the other sugar companies had to pay for imports. Its recent performance is decent. Revenues have grown 21% over the past five quarters. Operating profit margin in the past two quarters has been excellent because of the rising sugar price. The five-quarter average OPM is 23%. The stock is really cheap. Its market-cap is just 0.15 times its sales and 0.65 times its operating profit, despite the fact that the stock has moved from Rs27 in early December 2008 to Rs81 now.

Oudh Sugar Mills is another KK Birla group company and has three sugar mills, one in Hargaon (UP) with a crushing capacity of 10,000 tonnes of sugarcane per day, one in West Champaran (Bihar) with a crushing capacity of 7,500 tonnes per day and other in Shahjahanpur (UP) with a crushing capacity of 4,200 tonnes per day. It has set up two distilleries, one in Hargaon with a capacity of 11.53 million litres per annum and another in West Champaran, with a capacity of 4,200 tonnes per day to utilise molasses. To meet the growing demand for ethanol, it has set up an ethanol producing plant in Hargaon. It also has three co-generation power plants. As sugar earns the maximum revenue for the company, sugar price rise is expected to boost its topline in the next few quarters. Sales in the March 2009 quarter, have fallen from those in the December quarter, but there was a slight increase in operating profit. The average sales growth over five quarters was 55%. It operates with a healthy 23% margin. The stock had hit Rs294 in late April 2006 and then fell all the way to Rs22 in late December 2008. It moved up to Rs65 at the time of writing. But its market-capitalisation is still 0.33 times its sales and 0.98 times its operating profit of March.

Kesar Enterprises has its sugar factory in Baheri, UP. Its agro-tech division claims to have standardised a cost-effective technique for fast multiplication of sugarcane tissue-culture plants which are sold to local farmers at subsidised rates. Its distillery division contributes a significant portion of its revenue. In the March quarter, its distillery segment was the largest revenue contributor. It has not been able to gain from the rising sugar price in the March 2009 quarter as its sales declined from the December quarter. The stock had touched Rs279 in late April 2006 and then fell all the way to Rs31 in late December 2008. It has moved up to Rs71 at the time of writing but is still cheap. The five-quarter sales growth is a healthy 44%. It operates with a relatively low margin of 14%. Its market-capitalisation is just 0.21 times its sales and 0.72 times its operating profit.

Dwarikesh Sugar has three sugar plants – all in UP. Two of them are located in Bijnor district and the other is located in Faridpur district. The capacity of the distillery unit is 30 kilolitres per day. It has 86MW of power generation capacity, of which 30MW is used for captive consumption and the rest is sold to the UP government grid. Its five-quarter average sales growth was 40%. The margin has surged in the past two quarters which is attributed to the rising prices. Its operating profit margin was 26%. The lower sugarcane acreage in UP is likely to continue in the coming harvest season which will keep sugar prices high. Dwarikesh is expected to gain from this. Its market-cap is 0.34 times its sales and barely one time its operating profit.

Bajaj Hindusthan Sugar & Industries is the changed name of Pratappur Sugar and Industries which was bought by Bajaj Hindusthan Ltd (BHL) in 2005. The plant had a capacity of 6,000 tonnes crushed daily (TCD). Three new plants have also been opened with a total capacity of 34,000 TCD. Its distillery can manufacture 160 kilolitres of industrial alcohol per day. The company’s operations are backed by 88MW of power. It operates at a healthy margin of 24%. In the March 2009 quarter, it made a forex loss of Rs21.36 crore which reduced its operating profit to Rs119.55 crore. The March quarter marked a turnaround; the company had lost money in the previous two quarters. Its market-cap is 0.87 times its sales and 0.69 times its operating profit. It is cheaper than BHL, although it is under the same management and is, in fact, a subsidiary of BHL.


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