Key factors for a Sugar Company

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Key success factors for a Sugar Company

 

In light of the factors affecting the financial performance of the sugar industry and that of individual companies in the industry, CRISIL Research has attempted to identify certain key factors for a company to be a successful player in the sugar industry.

Plant size: The total sugar output of a mill is a function of its capacity and the number of days that the mill operates in a season. As with any other cyclical commodity industry, size is of vital importance in the sugar industry, as it provides some protection against cyclical downturns. Larger size will enable mills to reap the benefits of economies of scale and reduce their cost of production. The cost of sugarcane (60-65 per cent of the cost of production) does not change with increase in plant size, but there is a decline in the conversion cost in a larger plant.  The Tuteja Committee, in its report, has stated that a plant size of 5,000 tcd, will be optimal in the Indian context, taking into account the small size of land holdings (there are a number of small and marginal cane farmers, whose landholding is just 1-2 acres. The average land holding is estimated to be lesser than 4 acres); infrastructural constraints that impact the transportation of cane, and the global trend towards higher capacity plants.

Adequate availability of sugarcane: The sugar plant must be located in an area, where sugarcane is adequately available. Favourable agro climatic conditions, sugarcane acreage, cane yields, payment of remunerative prices to farmers in a timely manner, and relative attractiveness of other crops vis-à-vis sugarcane affect the availability of sugarcane within the reserved area of a mill. Non-availability and shortage of cane is one of the main reasons for a sugar mill becoming sick. If a plant is situated in an area with a short supply of sugarcane, its capacities would lie unutilised and its operations would become unviable.

Sugarcane drawal: The ability to draw a higher percentage of sugarcane from the sugarcane available in the command area of a mill (also known as cane drawal) is also important. Higher the cane drawal, lower the diversion of cane to other sources such as alternative sweetener manufacturers and vice versa. When farmers are assured of remunerative prompt payments, the diversion is often reduced.

Proximity to higher yield sugarcane farms: Sugar plants have to be located in the proximity of sugarcane farms due to the bulky nature of cane, its high volume to weight ratio, and the need to crush the cane as soon as possible (ideally within 24 hours of harvest) for obtaining optimum results. Mills located near sugarcane farms, with high yields, are in a better position than mills close to low yielding areas, as they receive more tonnes of cane per hectare to crush.

Proximity to deficient markets: Sugar is a bulky commodity, and freight is an important element of cost. Therefore, mills located close to sugar deficit markets - West Bengal, Punjab, Haryana, Delhi, Madhya Pradesh, and the North-East - enjoy a competitive advantage, as their realisations are higher than those situated near surplus markets.

For example, sugar mills situated in east Uttar Pradesh can access the deficit markets of the east and the Northeast, while those in west Uttar Pradesh can sell their sugar at competitive rates in Delhi and Madhya Pradesh.

Maximisation of sugar recovery: Optimisation of sugar recovery is another major differentiating factor among mills. Even a small increase in recovery levels could have a significant impact on the profitability of a company. Sugar recoveries depend upon the location of the mill, quality of cane, the time between harvesting and crushing, efficiency of operations, internal plant efficiencies, processing losses, and the time when crushing takes place. Investment in sugarcane development activities (strengthening of irrigation infrastructure, supply of improved seeds and proper fertilisers to farmers), timely crushing of cane, development of infrastructure around the plant area, and selection of proper plant and machinery could help in obtaining higher recovery rates.

Breakdowns and stoppages: Sugar mills operate on a continuous basis during the sugar season. Any stoppage in operations or breakdowns, due to non-availability of sugarcane, mechanical or electrical faults, or other technical problems impacts overall production and increases costs. Sugarcane starts drying as soon as it is harvested and sucrose evaporation takes place continually, therefore, any disruption in plant operations causes cut cane, waiting to be crushed, to pile up, which, in turn, impacts recoveries.

Relationship management: The relationship between sugar companies and farmers is another vital factor determining the success or failure of sugar companies. A healthy relationship between a mill and farmers, in its command area, will ensure adequate and timely availability of cane for crushing. In addition, maintenance of healthy industrial relations and cordial relations with the government and local authorities, such as the Cane Commissioner, is also important.

Efficiency in operations: Recovery levels, size, and control over manufacturing costs are the key profit drivers for sugar mills. It is imperative to make continuous efforts for improving operating efficiencies and lower manufacturing costs.

Value addition from by-products: Optimal utilisation of by-products, such as molasses and bagasse, is another key differentiating factor. Integrated sugar mills (mills which produce not only sugar but also ethanol and industrial alcohol from molasses and power from bagasse) are more likely to be successful than standalone sugar companies. An integrated business model is the key to de-risking revenues. By opting for such a model, mills can earn higher margins, and also partly protect themselves from the cyclical downturns in the core sugar business.

Efficient working capital management: The sugar industry is highly working capital intensive. Sugar production is seasonal in nature, with most of the crushing taking place between November and May and being sold throughout the year. As a result, sugar producers are forced to carry large inventories over long periods of time. Efficient working capital management, lowers the cost of funds for a mill; thereby, increasing its profitability.

Comfortable cash flow and manageable interest burden: A sugar mill should also have a comfortable cash flow situation and debt-equity position. This will enable it to survive during rough periods. A highly leveraged position makes a mill vulnerable to business shocks during cyclical downturns.