Sakthi sugar - update

A lot of you have written to me about my views on Sakthi sugar and its underperformance. My views are as follows.

The share price of a company is a function of both the financial performance as well as the perception of market players. I am still sure about the performance of Sakthi sugar. That is because of the following reasons (and these facts are known to everyone). I am only trying to put it in perspective.


a) My estimate is that it should have an EPS of around 40 for this year as well as about Rs 30 to Rs 35 for next year. This would make the PE for the stock at just about 1.5 to 2.

b) The sugar shortage is for real and no matter what the government does this shortage will be there.

c) Sakthi sugar is largely a refiner of raw sugar and it had contracted for its requirement far before everyone else. And hence its cost base is still quite low. So even at ruling price of Rs 28 to Rs 30 it should make a decent profit this year. (Though I still think that the prices should inch up from the current levels). Infact if you remember the current prices are about the same as that ruling in the September 09 quarter and even at those prices Sakthi sugar made quite a profit. Please have a look at the interviews by the management of Dhampur and Sakthi after the September 2009 results to know the average realisations and their performance within that realisation band. So even if the sugar prices do not go up Sakthi sugar should be able to repeat its September 2009 performance in the next 2 to 3 quarters.

d) The price paid for sugarcane by the south based mills is considerably lower than that of the UP based mills and hence their cost of production is lower than the UP sugar mills.

e) Sakthi also has an auto component business unlike other sugar companies. Am sure this will be revived sooner rather than latter. I dont have access to the last balance sheet of Sakthi sugar but I think the debt taken by Sakthi sugar was to fund the auto component business as well as some expansion. It was a pragmatic step by the management to hedge itself against the sugar cycle. Dont think any sugar company has tried to do such a thing. Its just sheer bad luck that the world economy collapsed. Am sure this business aspect will be looked into by the management soon.

f) The company has gone through the CDR process and is slowly trying to clean off its debt problems. Apart from the  Rs 100 crores of FCCB conversion (discussed in my post in February 2010) it has also converted about 10 crores of FCCB as recently as 15th March 2010.

What we are also forgetting is that these sugar companies are not here for charity. If the price of sugar goes down next year, then the price of raw materials will also come down. Be it raw sugar or the cane prices both will have to come down. They might not be able to make supernormal profits like this year but they will still be making profits for sure. If you look at the last sugar cycle what went wrong for the sugar companies was the high level of debt they had taken for capacity expansion. Dont think that is the case this time round.

Coming to specific question about Sakthi sugar. I am still hopeful of it posting good results this year as well as next year. An indicator of it is the fact that it is thinking of giving dividend year which it has not given for the past so many years.

Its results are due to be announced on 29th march 2010 which is this monday. So lets wait for the results to find out the actual financial position as well as its future plans. Also the official production numbers for sugarcane should be out soon. Lets wait for that as well before taking a call. Am not talking for the sugar sector as a whole but as far as Sakthi sugar is concerned its a hold for now.