Indian Sugar Sector: A Bitter Mess of Politics and Policies Stocks covered EID Parry, Praj Ind.

 After the recent post on Praj Industries (Click here for the post) I am getting repeated queries on the Indian Ethanol and sugar sector. I generally avoid commodity stocks like steel, sugar etc. But my interest in sugar sector was mainly due to the hunt for a player who can establish first Indian premium sugar brand. EID parry was a step in this direction ( Click here for the first part) and (here for 2nd part on EID). EID was earlier advised around 160 and then at 300, CMP is 370 and i have done buying recently around 300. I do not follow sugar stocks that keenly and for that reason not a regular tracker of sugar industry. But will try to share my view on the sector. Indian sugar sector (Like every other sector) is a victim of shabby govt planning and control. 

But let me tell you some good things first:

Indian sugar industry which was going through the pain for last 2-3 years had witnessed some revival last year mainly due to local and global rise in sugar prices and some corrective policy measures from govt.

Drought lead to low production in Maharasthra and Karnataka last year and rising global prices result in the price rise in India which saved the ailing sugar industry. In 2016-17, Indian sugar production was around 20.3 MT and over all consumption at about 24 MT which was the main reason for the price rise. Globally demand was higher resulting in high prices which further provides the support to Indian sugar industry.

Global supply declined because of increase in the use of sugarcane for producing ethanol in Brazil due to the increase in mandated ethanol blending in gasoline, from 25% to 27%. And in other places like Thailand, China’s production declined on account of decrease in the area under cultivation due to high producer costs. This was normal consolidation where low prices put pressure on the supply side. 

Indian government also introduced various measures to boost exports and curtail sugar imports which resulted in the growth of wholesale sugar prices in India. The government in December 2015, announced production subsidy @ Rs.4.50 per quintal of cane crushed which should be paid directly to the farmers on behalf of the mills and after the rise in the sugar prices it had been withdrawn.

But now again, global prices are falling due to supply issues. India is also going to witness high sugar production this year…around 25% growth. Area under sugarcane cultivation has also been increased by some 10%. But this time, Indian Govt has imposed import duties. Wholesale prices this time are around Rs. 36 per/KG. So all that means that Indian sugar prices may not fall that much to lead sugar industry again into mess.

Now let me come to messy part:

I have already mentioned the mess created by politics and Govt in Indian agriculture in so many of earlier posts. Sugar industry is one of the prime victim of political melodrama and policy quagmire. Millions of farmers cultivate sugar cane so in order to lure their votes central and state governments fix sale price (via all types of MSP, FRP or SAP) of sugarcane to be paid by sugar mills turning sugar cane into a major cash crop and every year more and more farmers are lured to grow sugarcane. Maharashtra grows sugarcane when in fact it is not suitable at all to grow sugarcane as most of its sugarcane producing areas does not receive adequate rainfall.

This year also, area under sugarcane cultivation has also been increased by some 10%. So we can see that more sugarcane is getting produced in India and Sugar mills are under legal compulsion to buy and crush all the sugarcane produced in their areas. It results in much higher production of sugar than the actual demand. India produces on average around 35 million tonnes whereas demand is around 24-25 MT resulting in the over production of 10 MT which depress the sugar prices and sugar mills incur heavy losses which also hamper their capability to pay the farmers dues on time. So to overcome this crisis, either the Govt pays the farmers the arrears through subsidy (like it did last year) or it buys out the excess sugar from mills at higher prices or it allows mills to export excess sugar produced by offering export incentives which are nothing but a part of the cost of sugar production in India as global prices are down so Indian mills are  forced to sell sugar in international markets below their cost and to make their losses good Govt offers them export benefits!!!!...???? AMAZING…isn’t it!!!

In Maharashtra, in the last five years, sugarcane prices have gone up drastically as compared to other crops like wheat, soybean, cotton or paddy. So although sugar prices are falling but farmers are still growing more and more sugarcane because they are assured of price and procurement by mills.

And to make the matter worse is the shortage of pulses and oilseeds in India due to which India is forced to import pulses and oilseeds worth thousands of crores. India imports 60% ( Production of 9 MT against demand of around 24 MT) of its edible oil needs valuing some 70000 cr!!! The figure for the import value of pulses is 20-25000 cr which is around 25% of India’s demand for pulses!!! 

One of the primary reasons for this shortage is the usage of agro resources like land, water, Govt support on on excess production of cash crops (Political crops!!) like sugarcane, rice etc. All this leave little for the support of oilseeds and pulses. States like UP, Karnataka and Maharashtra provide preference to sugarcane for water supply and almost 100% sugarcane area is under irrigation. Loan free schemes, Interest free schemes are launched regularly by Government to save the farmers which left very little in the hands of Govt to spend on more important pulses and oilseeds. Our government does not even have a regular focused agro policy as they keep changing their actions like at one time they impose export restrictions and then all of a sudden reduce the import duty, they say publically that grain production is sufficient but then they allow the imports and lower the import duties…they just don’t know what they are doing and what is their target. We also don’t know when this mess will end….political masses are very consistent in creating and making people living in mess.

So all this creative policy making results in overproduction of sugarcane and sugar and an industry marred with high losses and farmer overdues. But at least now I feel that our government will impose import duty to keep domestic sugar prices well above cost of production in order to safeguard mills and farmers (and of course themselves). So I don’t see big headwinds in the sector in the near future. 

Mess and More Mess

But this is not the ideal solution as we should first of all solve the issue of high cost of sugarcane cultivation in India. The reasons for high cost of production in India are many like shortage of water and irrigation facilities, poor land selection by farmers due to assured prices as most of the sugarcane produced in our country has low sugar content of below 10%, less use of adequate fertilizers, micro-nutrients and pesticides resulting in low productivity , very small land holdings etc. Sugarcane is a very stubborn crop: has some 12 month cycle, needs huge amount of water regularly, not economical to store sugarcane due to low value and low sugar content, as it has low sugar content compare to its weight and loses sugar content quite fast so mills have no other option but to crush it sooner. So much to make it a sweet deal!!!

But please do not think that our Government is doing something good for farmers and mills by loan waiver and interest waiver schemes because all the money that they wasting is taxpayers money and they are just wasting it to lure the farmers to remain in the power. 

Like, it is mandatory for each sugar mill to sell 10% of its production to central government at lower price than market value (Levy sugar) so that our highly intellectual government can meet its targets to distribute low cost sugar through PDS. The result of this charity-Rs. 3000 cr burden on sugar industry which ultimately falls on taxpayers.

This entire policy quagmire has resulted in the dire consequences for country as situation of our precious natural resources like land and water is worrisome. So it is better to leave the theme of “Poor sugarcane farmers” and to make farmers aware of the other better opportunities in other commercial crops like pulses, oilseeds, horticulture, fruits etc.

Direct Ethanol production is one of the Option

However, due to complexities of the sugar sector due to involvement of politics means that current production status quo may be maintained and we may continue to have excess sugarcane cultivation. But one thing I would like to mention is that Indian sugar companies derive substantial portion of their profits from ethanol and spirit so in my view it would be great if our government could allow direct production of ethanol from sugarcane juice rather than from molasses. This will increase the production of ethanol manifold along with ensuring the better demand supply situation for sugar in the country.

Conversion of excess sugarcane to white sugar is foolish and must stop. Instead, our Government should assess the demand of sugar in the country and should direct to use some part of sugarcane for producing ethanol directly. So I hope that in the future our government will come up with some better and long term policy with regard to production of ethanol directly from sugarcane juice and if that happens then there will be high re-rating of the sugar stocks.

But still nothing compared to the quantum growth which will occur to Praj if its 2G ethanol project is a commercial success.

Last year UP based stocks tasted the sweet success

I am not tracking many sugar stocks apart from EID Parry which is my favorite due to strong brand recall, visionary management, high share of institutional sale, high growth bio-pesticides and nutraceutical business. EID parry is one of the most efficient producers of sugar in India and associated with introducing revolutionary technologies in sugarcane production in areas it operates. It has very strong relations with farmers which shows the high ethical standards of the company. 

In the bull run of sugar stocks last year, south and western states based stocks did not given that much returns as most of the southern and western states suffered drought last year and not enough sugarcane was available for crushing and enjoy the high sugar prices. So UP based companies made the most of the Bull Run as they had the production and inventory to supply sugar to all India. Stocks like DCM, Dalmia and Balrampur has given high returns ranging from 500% to 1000% as they witnessed quantum jump in their profits. In fact, I think that even in this year, UP based companies may be the only ones carry good quantity of sugar stock. But I do not track any other sugar sector company besides EID so not sure which is the best bet now. However, whenever I’ll got some spare time then will try to find something in northern India sugar industry and will share the same. By the way, I am holding DCM Shriram which is the parent of DCM Industries which is into sugar. DCM Shriram was suggested around 60 at this blog and it is trading at 530 and I am still holding this one.

All the growth witnessed by south based players like EID parry was due to price increase not due to volume growth. EID, in 2016-17, crushed 44.44 lac MT of sugarcane as compared to 56 lac MT last year a drop of 20% and total sugar production was at 4.33 LMT as compared to 5.87 LMT last year.

It was all downhill for south based sugar companies last year-Still I like EID Parry

This year rain was good especially Maharashtra witnessed good rains and it is expected that Mharashtra will see some 70% growth in the sugar production next year. Karnataka also got good rains and so that will help EID parry to some extent but Tamil Nadu and AP didn’t get too many so EID has given the guidance of overall crushing of 39 LMT down from 44 LMT last year which implies that EID will have to focus on imports of raw sugar to meet its production targets but realization will be impacted due to high cost of import of raw sugar.

However, EID has got the approval from Indian Govt for the duty free import of raw sugar of 64000 tonne and so it is expecting to meet its previous year sales volume. It is expecting that Karnataka will make up to some extent the loss suffered in Tamil Nadu. Last yeat although It crushed less sugarcane but due to sugar stocks of previous season it managed to salvage the downhill. 

I also feel that Drip irrigation and river interlinking project can save the chronic issue of high dependence on rain water in India. Maharashtra has even made the use of drip irrigation mandatory for sugarcane cultivation which I feel is a step in the right direction.

South India was the corner stone of water conservation in India during ancient times. But at present state like Tamil Nadu has exploited 80% of its irrigation potential and some 142 water blocks are in over exploited zone out of total 385 water blocks. South India receives two monsoons a year and we also hear the news of Chennai getting flooded every now and then. So then what is happening to all this water? Actually the reason is high ground water based irrigation systems while earlier they were using techniques like rain water harvesting for better use of rain water which they are not doing now and the result is severely depleted ground water levels. All this has turned water surplus southern India to water depleted. 

But now some parts of Tamil Nadu are trying to revive their century old traditions of using rain water more efficiently and also focusing more on organic farming which needs much lesser water due to lower use of chemicals. Moreover Southern states are more suitable for sugarcane cultivation and TN has highest yield in India almost twice of UP. So they should plan to better manage their water resources.

EID is the preferred supplier to Institutional customers due to its high quality products, global certification and customization. Institutional sales always accounts of high share of 40%-last year it was also at 44%.

Last year, the Company commenced the sale of Bonsucro certified sugar, produced from sustainable sugarcane, to a large multinational. With importance on sustainable cultivation practices gaining ground globally, food and beverage manufacturers are taking the lead. E.I.D Parry’s Bonsucro certified sugar will prove a competitive advantage for the company in the long term.

EID’s effort to grow its premium quality and highly nutritious sugar brands “Amrit” and “Vita” and regular premium sugar brand “Parry’s” will bring high growth as there is still a vacuum in Indian branded sugar industry as all the sugar consumed is of bulk quality.

EID has just opened its export based sugar refinery in Nellikuppam which is an SEZ and it imports raw sugar and exports white sugar. It is one of India’s first zero discharge refinery. This year turnover was 1878 cr with NP of 14 cr. The refinery produced nearly 5.98 lakh tonnes of raw sugar and exported 5.96 lakh tonnes. EID is looking to expand the production further and this will be a huge value creator.

At present there is no doubt that Sugar sector in south India is stressed but a lot of efforts are underway to solve the crisis and I think out of this some long term and sustainable solutions will emerge out of this like drip irrigation, rain harvesting etc.
But it also means that sugar prices will remain high in South India as compared to other parts of India and EID may be able to make up for some volume loss due to this.

As shared earlier I am highly optimistic of its nutraceutical business under which it produces, brands and sells algae based nutritional products demand of which are growing fast worldwide. This business is not small and clock around 230-240 cr revenues

EID Parry has very strong R&D in place for nutraceutical product as it is currently the only company in the world with the capability to produce all the three algae-based dietary supplements, including Spirulina, Chlorella and Astaxanthin. In May-2017 it has received the approval from USFDA for its India facility for organic microalgae cultivation and processing which is a 130 acres facility located in Oonaiyur, Pudukottai district in Tamil nadu. This is a significant move as the same will enhance the credibility in the global market. Already the company has witnessed higher sale in European region after the approval. Algae based nutritional products are a growing rage in the western world and these are being consumed in a variety of novel ways like in health drinks etc.

India’s per capita income is also growing fast and as per the experience of the developed economies after a certain level, more growth in income will make people consume and spend more on nutritional supplements. Same thing will be going to happen in India. Only thing which I expect from the management of EID parry is to spend more on brand and product promotion as there are not many people in India who are aware of the presence of algae based nutriceutical products. So I think there are interesting times ahead for organic and herbal nutritional products in India and I don’t see any reason for EID parry to miss this high growth opportunity.

So sugar mills in northern part of the country are poised for another good year but I think most of the growth has already been factored in the current prices wherein in case of EID no value has been assigned for sugar business at all when it is one of India’s best sugar producer. Moreover EID has a lot of unused capacity which in a good cropping year will yield bumper profits and that will provide huge upside from current levels. But still hunt for another pick in sugar sector is also underway and I’ll share the same if find something.

Also, as explained in the earlier posts, the current market value of the EID parry is 6500 cr which just covers its investments in Coromandel International; 62% share in Coromandel is values around 7000 cr after giving holding company discount of 30%. So that means that you are getting standalone EID with some 2500 cr turnover absolutely free and that is a sweet deal!!

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post) 

Praj Industries Ltd: A Revisit

Praj Industries was advised earlier around  80 ( Click here for earlier study) and I was following it regularly looking for something concrete in its ethanol or other emerging businesses like Hi-purity water, waste water treatment and brewery plants. I have already written about its ambitious plans for 2^nd generation biofuel plants and this is the area which I have always felt can create huge value for Praj if it can develop the technology to create ethanol from agro residue like rice husk, wheat straw, corn straw, cotton straw, Bamboo etc. 

A lot of activity is happening in 2^nd generation front for last one year or so. So last month I made my second entry at 68 and then few days back at 82. Indian Govt has mandated the blending of 10% of ethanol however due to poor state of sugar industry for almost a decade the actual blending was just some 3%-4%. Now sugar industry is reviving fast and soon we’ll see big investments from sugar companies into new ethanol plants which will benefit Praj who is having around 80% share of India’s ethanol market. Govt is also doing some real work on the policy front like freeing the pricing formula for ethanol. Also now Govt has plans to raise the ethanol blending to 22.5% mainly based on 2^nd generation biofuel. 

India generates huge agro waste and biomass which can be used for the production of biofuel. This will save precious resources being spent on oil imports and will also create big employment along with raising the farm income. I am always in favor of using locally available substitute for an imported item even if the local substitute is costly as the same will keep the money (resource) in the country generating employment in this cycle which ultimately will provide benefit to all in some other form like increase in the demand for other products thus promoting further growth, low interest rates due to high savings, availability of risk capital etc. In an economy, one plus one is never two because an economy is never a static entity but it is an ever changing cycle.

Issue of low ethanol production in India

Some people surprise at why India is not being able to produce huge quantity of ethanol when we produce so much sugarcane. Brazil has big ethanol industry which has enabled it to leave its dependence on oil imports and curbing the pollution also. Then why we can’t? Actually the reason here is again the same-Government policies. Most of the times, we are the creator of our mess. In India, Govt only allows the production of ethanol from Molasses which is a byproduct of producing sugar from sugarcane and our “vote bank friendly” govt doesn’t allow the production of ethanol directly from sugarcane in the name of food safety. But our central and state governments fix the price of sugar cane which must be paid by sugar companies to farmers. But due to global stress, prices of sugar was low so after paying high price to farmers our sugar companies sell the sugar below cost!! So they prefer to sell molasses (without any processing at extra cost) or rectified spirit to liquor or other industrial customers rather than selling the ethanol to OMC’s at low regulated price after investing big for ethanol plants. Liquor companies pay them some 20-25% more than the OMC. In countries like Brazil, direct production of ethanol from sugarcane is allowed and prices are linked to petrol to promote more ethanol production while it is quite opposite in India.

Further, molasses is marred by high political mess in India as almost all the states impose curbs on movement of molasses out of the state along with heavy taxes. States mandates the sale of a fixed portion of molasses produced to liquor companies (who return the favor to these politicians). So even the price charged to these liquor companies is lower because here too Government pockets the maximum out of sale of alcohol. In India, almost all of alcohol is made of molasses which costs them some 50 Rs. Per litre and then these liquor companies add some flavors and colors (No maturation) and you have the IMFL ready to be sold at 700-1000 per litre out of which state Govt pockets around 50%!! So its all big mess here although politics and mess will remain together forever.

Huge activity is underway on 2G ethanol front

Praj has developed the technology for 2G ethanol and it is running a demonstration plant near pune with the capacity to produce 1 million litre per year. This plant is based on the patented technology named “Enfinity” developed by Praj after 7 years of efforts which use a mix of enzymes to convert the cellulose of agro waste and residue into glucose which is then used to make ethanol. As per some estimates, by using all of our Agro waste we won’t be required to import oil at all. I also feel that making ethanol from Sugarcane or corn is not a great idea as there is big debate on food vs fuel along with the fact that these crops need big natural resources like water. So I think, if we can produce reliable 2G ethanol from agro waste then this miracle will become real. Enfinity can even manage the tough task of 20% ethanol blending  quite easily.

Indian Govt has given the responsibility of developing ethanol especially 2G ethanol on oil marketing companies like IOCL, BPCL and HPCL. These 3 have big investment plans for the same. In fact, IOCL and BPCL have already entered into partnership with Praj for setting 2G plants. Work is underway for setting up a plant for IOCL in Panipat and Dahej on cost share basis. BPCL has selected Praj as technology partner for setting up one 2G bio-ethanol plant in Orissa having the capacity of 100 kilo litres of ethanol per day. Around 10 to 12 2G ethanol projects are expected to be finalized with average capex of around Rs 600 crore each with each one having the capacity to produce 100,000 litres of ethanol per day. So in the beginning around 5000 cr is at stake and even a moderate success may open the big gates for Praj.

Indian Glycols Ltd is also operating India’s first 2G ethanol demonstration plant at Kashipur in Uttarakhand, with a capacity of 10 tonnes of biomass per day.

Praj has even launched a green fund that will help it take up projects to make second-generation ethanol plants. We’ll see high activity in biofuel segment this year especially when our Govt is serious on curbing pollution and OMC’s have their task cut out as they have entered into partnerships with Praj already. 

Praj has a significant global presence as it is operating in 75 countries and has built big ethanol plants in UK, Germany, Belgium etc. Almost all the ethanol plants in Colombia have been built by Praj and as per management Praj accounts for around 7% of total ethanol produced globally. 

Praj’s waste water and Hi-purity water business is seeing high growth. Tougher standards for Pharma and food and beverages sector are presenting high growth opportunities for Praj.

Today Praj spiked big time by 20% to 106. I still do not know the reason of the same but I always have the faith in companies with high technical abilities as they can turn the tide anytime. Praj with 16 patents approved (80 under approval), 80000 Sq feet R&D centre, nil debt, 1000 cr turnover, dividend yield of 2% even during moderate/low growth period of 5-6 years has enough in it to do the same...the only question is of timing and i feel that the same is near.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post) 

Quick Heal Technologies Ltd: Don't loose the Faith So Quick-3rd Part-Results update

In my previous posts on Quick Heal (For Earlier posts, Click here and here) I was expecting it to make a recovery in its business after recent headwinds in the economy….and it has delivered Quick. Quick heal has given good set of numbers in Sep-17 quarter results. I just want to highlight some of the glaring factors:

1.      Topline is flat at 105 vs 106 cr. But it is commendable keeping in view the recent headwinds in the economy due to GST/Demoney, Quick heal revamping its distribution channels, strong competitions as competitors have also upped the ante for marketing and distribution. This flat will look elevated if you compare it with the HIGH market expectations of de-growth. For reasons related to the “Indian-ness” of QH, market had literally thrown it into the dump.

2.     Overall user base witnessed good growth especially enterprise segment which I feel will see high growth in the future. Enterprise segment now has 21% share in the total revenue as compared to 16% last year. This quarter revenue growth in the enterprise segment is 27% while retail segment has de-grown by 7%. However this fall in retail revenues is mainly due to higher demand for low value products as figure of number of retail licenses sold this quarter have increased to 20.26 lac as compared to 19.62 lac last year.

3.     In spite of “visible” flat revenues it has still managed to report higher PBIT figure of 59 cr Vs 55 cr last year. Again this is significant as this was not expected.  I think its profits are impacted due to high focus and expenditure on developing distribution channel to penetrate the tier-2&3 cities.

Distributors and physical distribution reach still is one of the most significant winning factor even when people take “Internet/E-commerce” as a panacea for everything. Even providers of cloud have realized the role of distributors and Our Redington India and global giant Ingram Micro are big players in the distribution of cloud products.

4.      Working capital management has improved big time. QH has managed to bring down the debtors from 95 cr in Mar-17 to 61 cr. This has resulted in the improvement in working capital days from 48 last year to 34 now further improving cash flows.

5.   Now coming to one of the most overlooked fact. QH has around 420 cr in investments and cash in books which is around 30% of the current market value of 1470 cr!! Market has decided to blindfold itself with the “Indian-ness” of QH and ignored the most basic valued factors of a good stock. If we leave this 420 cr out along with related interest income then it means that QH is available at a market value of 1000 cr and its PE will touch 18-20 which is very cheap.

Also this high cash means QH can use this for acquisitions in high tech fields and I have no doubt that very soon we’ll see something big like this coming out.

6.   QH cyber security products have protection from ransom ware and recently when globe was hit by “Wannacry” ransom-ware, No QH client was affected by Ransom-ware. But People raise questions about the technical expertise of QH.  I have explained in my earlier post about the collaboration of QH with Cert-in (Ministry of Electronics and Information Technology) for providing free services for the removal of Botnet in India. But what does it mean?

Why Indian Govt has decided to choose QH for the task if there are so many highly advanced global cyber security firms operating in India especially when most of them are already providing their products FREE? I have seen many people questioning the idea of paying a price for a cyber-security product when these are available free.

Then why QH was chosen? Whether it is because of technical expertise of QH? Whether other high tech free product providers were not willing to provide it free? Or it is because our Govt prefers (or needs) Indian-ness in cyber security? I am leaving it to you people to decide.

7.      I have already shared in earlier posts that Indian Govt will give preference to Indian products. Why?  If we go by the information leaked by Edward Snowden, countries especially US and China are watching, scrutinizing India all the time. In fact India is one of the most watched, and scrutinized nations of the world. Chinese hackers are breaking and stealing information from servers of Indian Govt all the time so easily. And at times when our Govt is dreaming, selling and hoping digital India and smart cities, the threat to our cyber security are serious.

Quick heal was advised recently around 180 and it closed today at 208, up 6%. But it is still way cheap at PE of 20. Promoters have not sold a single share in the IPO, not afterwards…it is investing heavily on brand building…more than any other brand. Better to pick it now before it is too late to HEAL.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post) 

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