Whose profit was sweeter from the sugar price rise?

As cane growers and sugar producers tussle over a “fair” price for sugarcane, who has benefited from the soaring sugar prices and expanding by-product sales over the past few years? If you look at share of profits, it would be the sugar mills.

However, if you looked at the absolute sums earned, it would be the cane growers. This is what the financials of 19 leading listed sugar producers with a decade-long operations suggest; this may not be representative of the entire industry.

Holding to their share

As the fortunes of the sugar industry turned for the better over the past decade, sugar producers have scaled up capacity and added facilities for processing cane by-products into ethanol and power. That nearly doubled the aggregate net sales of the 19 listed companies from about Rs 25,000 crore in the first half of the decade (FY2000-FY2004) to over Rs 50,000 crore in the latter half (FY2005-FY2009). During this period, sugar producers have continued to shell out about 63 per cent of their sales to cane growers for raw material. Raw material outgo for the 19 mills shot up to Rs 31,800 crore in the latter half of the decade from Rs 15,800 crore in the first half, keeping pace with sales growth. This suggests that growers managed to get their share of the higher revenues earned by the mills, whether from volume increases or sale of by-products.

Improved profitability

However, cane growers can rightfully claim that sugar mills have not passed on to them a larger share of the improved profit margins over the years. Even as sales surged, the listed sugar players saw a quantum jump in their overall profitability between the 2000-2004 and 2005-2009 periods. While sales doubled, the operating profits expanded by 230 per cent between these periods and net profits rose over tenfold.

Operating profit margins for the sugar mills averaged nearly 17.5 per cent for 2005-09, up from 15.4 per cent in the 2000-2004 period. The margin lift came mainly from savings in other manufacturing expenses, which were down by 2 percentage points, even as raw material costs as a proportion of sales remained the same.

The sugar mills can, however, claim that their profitability has only now reached acceptable levels. Net profit margin for the 19 companies stood at an anaemic 1 per cent in the 2000-04 period, and has improved to 6 per cent in the last five years. In the latest financial year, while the 19 mills expended nearly Rs 7,700 crore on sugarcane purchases, their combined net profits stood at just Rs 404 crore after paying off employees, manufacturing expenses and capital costs

source: thehindubusinessline