Ponni Sugars (Erode)

Ponni Sugars operates in the sugar industry producing sugar from sugarcane.

The company has access to relatively low cost cane supplies that provides it with some buffer during the industry’s persistent cyclical downturns.

The company has reported moderate growth in revenues over the last five years but operating profits (and losses) have been erratic.  It reported 15cr of operating profits on revenues of about 270cr under depressed operating conditions (see below).  It operated with a moderate net debt load of about 15cr but this is set to increase substantially over the next few years (see below).

The company intends to invest 110cr in increasing capacity via debt funding in 2012, which may increase its financial risk profile.   It also intends to invest heavily in a power co-generation project.  These additional capital expenditures will reduce free cash flows, at least over the medium term.

The business is exposed to the myriad problems of the sugar industry.  Sugar companies are currently attacked on both the cost and revenue sides of the equation by government regulations that require minimum prices for cane farmers and maximum prices for sugar.  The problem is the uneconomic nature of the government regulations that are slow to respond to global demand/supply imbalances, which increase price volatility, exacerbate the cyclical downturns in the domestic industry and reduce its competitive edge in the global markets (particularly against Brazil, which is the world’s leading sugar producer).

The industry is currently subject to artificially high cane prices and economically depressed sugar prices leading to unviable operations. Moreover, the government adds to the pain by allowing for duty-free imports and restricting exports as and when necessary to reduce sugar prices.

The large sugar price swings that result from the above factors make it difficult to predict future profits with reasonable certainty.

The company faces specific problems in low recovery and high sugarcane cost in its operating base in Tamil Nadu.  It also faces problems in employing low-cost labour for sugarcane harvesting and this may lead to increase labour costs in the future.

The company is a net importer and hence, is adversely exposed to a weakening INR. 

Parent company management does appear to use the company’s resources to finance equity investments in group companies but this doesn’t appear to be overwhelming at present.