Financial Performance of a Sugar Factory
Financial performance
The financial performance of a sugar factory mainly depends on the
following:
·
Demand-supply position and its impact on prices
·
Sugarcane prices
·
Utilisation of by-products
·
Plant size and location
·
Working capital requirement and cost of funds
·
Interest burden
Demand and supply position and its impact on prices
The demand-supply position of sugar is one of the major factors
determining the financial position of sugar companies. The stocks-to-use ratio
indicates the demand-supply position. A decreasing stock-to-use ratio indicates
either a decrease in the closing stock levels or an increase in demand for
sugar. Both these factors generally have a positive impact on prices and,
consequently, on the financial performance of sugar companies.
A favourable demand-supply situation would result in higher sugar prices
and better operating margins for sugar mills.
Sugarcane prices
Sugarcane is the main raw material used in the production of sugar. It
accounts for around 65 per cent of the cost of sugar production. Therefore, an
increase in the sugarcane prices negatively affects the operating margins of
the sugar manufacturers and the financial performance as a whole.
Utilisation of by-products
Effective and profitable utilisation of by-products, such as molasses and
bagasse, obtained during the sugar manufacturing process, improves a sugar
company's revenues and profitability.
Working capital requirements and cost of funds
Sugar is a working capital intensive industry. Sugar is mainly produced
between November and May, but is sold throughout the year. Hence, sugar mill
owners are often forced to carry large inventories for lengthy periods of time.
This makes the sugar industry dependent on short-term funds, which are often
available only at high interest rates. Efficient management of working capital
reduces the cost of funds for a mill and increases its profitability.
Plant size and location
The size of a plant is critical for containing the cost of production.
The cost of sugarcane does not decline with an increase in plant size. But the
conversion cost per tonne is lower in larger size plants. The location of a
plant also affects the financial performance of a sugar mill. If the plant is
situated in an area where sugarcane availability is inadequate, its operations
would become unviable.
Interest burden
Many sugar mills are highly leveraged and have a heavy interest burden.
A high debt-equity ratio makes these mills highly vulnerable to business shocks
during periods of downturn. On the other hand, a mill having a comfortable
debt-equity ratio will find it easier to survive during rough periods.
Financial performance review
Between 1995-96 and 2006-07, the average operating profit margin in the
sugar industry was 16.6 per cent. Operating margins of the industry ranged from
a high of 20.2 per cent to a low of 9.6 per cent during this period.
The sugar industry fared poorly in 2001-02 and 2002-03, as four
consecutive years of bumper production (between the 1999-2000 and the 2002-03
SS) and relatively slower growth in demand, led to massive inventory pile up in
the industry. Operating margins fell to 14.1 per cent in 2001-02 from 18 per
cent in the previous year, and in 2002-03, they slid further to 10.3 per cent.
In addition to this, the government announced its decision of
decontrolling the industry. The subsequent rush amongst mills, fearing a crash
in sugar prices post-decontrol, for obtaining court orders to liquidate stocks
in excess of the free sale quota allotted to them, worsened the situation. The
non-adherence to the regulated releases system resulted in excess supply of
sugar in the open market, due to which, sugar prices tanked to all-time lows.
Open market sugar prices fell even below levy sugar prices. The uncertainty as
to how much sugar had been released with court orders added to the panic in the
market. High inventory holding cost and the government's decision of hiking the
sugarcane Statutory Minimum Price, for 2002-03, by 11 per cent, only added to
the woes of the industry.
Sugar prices began to move up in the 2004-05 and 2005-06 SS, on account
of a decline in inventory levels; correspondingly, operating profit margins of
the industry moved up to about 19.6 per cent in the 2005-06 SS. In 2006-07 SS,
the industry witnessed a bumper crop where production for the 2006-07 SS
reached 28.3 million tonnes.
Consequently, the inventory level rose from 2.3 months in 2005-06 SS to
6.5months in 2006-07 SS. This resulted in price decline of sugar and impacted
the operating margins, which declined to 9.6 per cent in 2006-07 SS from 19.7
per cent during the previous season.
The average RoCE (return on capital employed) of the sugar industry was
at 10.3 per cent during the period, 1996-97 to 2006-07. The average net profit
margins were low at just 2.7 per cent between 1996-97 and 2006-07. The main
reason for the low net profit margin and RoCE was the high debt and interest
burden on the industry. The average debt-equity ratio, during the same period,
was significantly high at 2.4 times.
The debt-equity ratio is high, due to high borrowings required to fund
the sugar inventory (generally at its peak in March, due to the end of the
crushing season). The average finished goods days for the sugar industry was
high at 180 days during the phase of 1996-97 to 2006-07.
As a result of the high debt-equity ratio, the interest coverage ratio
of the sugar industry is low. Profits of the industry are hardly sufficient to
pay interest costs during the downturn. Between 1996-97 and 2006-07, the
average interest coverage ratio was at 2 times.
In conclusion, the operating margins in the sugar industry are moderate.
However, the net profit margins are low due to high debt levels.
Table 1: Sugar - Sector aggregates
|
|
Unit
|
1996-97
|
1997-98
|
1998-99
|
1999-00
|
2000-01
|
2001-02
|
|
Operating profit margin
|
per cent
|
19.8
|
20.2
|
19.4
|
18.3
|
16.5
|
14.2
|
|
Net profit margins
|
per cent
|
3.7
|
2.7
|
0.6
|
0.6
|
1.3
|
0.6
|
|
Return on capital employed
|
per cent
|
11.2
|
11.9
|
10.2
|
8.8
|
10.7
|
7.8
|
|
Interest coverage ratio
|
times
|
1.5
|
1.4
|
1.3
|
1.3
|
1.5
|
1.5
|
|
Debt equity ratio
|
times
|
2.1
|
2.2
|
2.5
|
2.8
|
2.7
|
3.1
|
|
Current ratio
|
times
|
0.7
|
0.8
|
0.7
|
0.8
|
0.7
|
0.7
|
|
Finished goods
|
days
|
231
|
202
|
216
|
265
|
212
|
197
|
|
Debtors days
|
days
|
17
|
15
|
14
|
16
|
14
|
15
|
|
Creditors days
|
days
|
135
|
101
|
113
|
136
|
103
|
122
|
|
Raw material cost as % of sales
|
per cent
|
61.6
|
61.5
|
61.2
|
60.6
|
66.3
|
68.6
|
|
Sugar production
|
million tonnes
|
12.9
|
12.9
|
15.5
|
18.2
|
18.5
|
18.5
|
|
Sugar consumption
|
million tonnes
|
13.9
|
14.7
|
15.2
|
16.1
|
16.2
|
16.8
|
|
Exports
|
million tonnes
|
0.4
|
0.1
|
0.0
|
0.1
|
1.0
|
1.1
|
|
Imports
|
million tonnes
|
0.0
|
0.9
|
1.0
|
0.4
|
0.0
|
0.0
|
|
Opening stock
|
million tonnes
|
7.9
|
6.5
|
5.5
|
6.8
|
9.3
|
10.6
|
|
Closing stock
|
million tonnes
|
6.5
|
5.5
|
6.8
|
9.3
|
10.6
|
11.2
|
|
Stock-to-use ratio
|
per cent
|
47
|
38
|
45
|
58
|
65
|
67
|
|
Average sugar price 1
|
Rs per quintal
|
1,365
|
1,474
|
1,452
|
1,466
|
1,440
|
1,397
|
|
|
|
|
|
|
|
|
|
|
|
Unit
|
2002-03
|
2003-04
|
2004-05
|
2005-06
|
2006-07
|
Average
|
|
Operating profit margin
|
per cent
|
10.2
|
15.2
|
19.8
|
19.7
|
9.6
|
16.6
|
|
Net profit margins
|
per cent
|
-2.2
|
2.9
|
8.8
|
10.3
|
0.2
|
2.7
|
|
Return on capital employed
|
per cent
|
4.0
|
8.8
|
17.2
|
18.1
|
4.3
|
10.3
|
|
Interest coverage ratio
|
times
|
1.3
|
1.9
|
3.7
|
5.2
|
1.7
|
2
|
|
Debt equity ratio
|
times
|
2.8
|
2.8
|
1.9
|
1.4
|
2.1
|
2.4
|
|
Current ratio
|
times
|
0.6
|
0.8
|
0.8
|
1.2
|
0.9
|
0.8
|
|
Finished goods
|
days
|
168
|
169
|
134
|
86
|
104
|
180
|
|
Debtors days
|
days
|
16
|
20
|
15
|
17
|
15
|
15.8
|
|
Creditors days
|
days
|
112
|
114
|
109
|
73
|
136
|
114
|
|
Raw material cost as % of sales
|
per cent
|
73.2
|
67.3
|
64.8
|
66.9
|
74.4
|
66.0
|
|
Sugar production
|
million tonnes
|
20.1
|
13.5
|
12.7
|
19.3
|
28.3
|
|
|
Sugar consumption
|
million tonnes
|
17.5
|
17.9
|
18.5
|
19.0
|
19.6
|
|
|
Exports
|
million tonnes
|
1.5
|
0.2
|
0.0
|
1.1
|
1.7
|
|
|
Imports
|
million tonnes
|
0.0
|
0.4
|
2.1
|
0.0
|
0.0
|
|
|
Opening stock
|
million tonnes
|
11.2
|
12.4
|
8.2
|
4.6
|
3.7
|
|
|
Closing stock
|
million tonnes
|
12.4
|
8.2
|
4.6
|
3.7
|
10.7
|
|
|
Stock-to-use ratio
|
per cent
|
71
|
46
|
25
|
19
|
55
|
|
|
Average sugar price 1
|
Rs per quintal
|
1,247
|
1,464
|
1,765
|
1,870
|
1,479
|
|
|
1 Mumbai S-30 prices for the respective sugar season
(October-September).
|
|
|
|
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|
Source: Prowess and CRISIL
Research
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