June 27, 2008 / 9:29 AM / 11 years ago

Rates, inflation bitters spoil sugarmakers party

MUMBAI (Reuters) - Indian sugar firms are weighed down by an interest rate spike and double-digit inflation that promises to pressure margins and raise project costs.

A labourer peels sugarcane at a wholesale market in Siliguri in this February 27, 2008 file photo. Indian sugar firms are weighed down by an interest rate spike and double-digit inflation that promises to pressure margins and raise project costs. REUTERS/Rupak De Chowdhuri

Most sugar firms such as Shree Renuka Sugars, Bajaj Hindusthan Ltd and Bannari Amman are expanding and diversifying into non-sugar segments to sidestep the cyclical nature of their core business.

While funds have been tied up for projects announced earlier, higher interest cost on working capital and sourcing money could scupper new plans, they said.

“I’m heavy on debt,” Girish Patkar, vice president of treasury operations and investor relations at India’s top sugar firm, Bajaj Hindusthan, said. “We also want to borrow money for arbitrage purposes. So, that cost will rise.”

“There will be pressure on margins immediately. And, you can’t even pass on the cost like that in an inflationary environment.”

India’s annual inflation rate jumped to 11.42 percent in mid-June, its highest in more than 13 years. The central bank on Tuesday raised its key lending rate and cash reserve requirements for banks by 50 basis points each.

Most sugar firms, which reported losses in the financial year-ended September 2007, recorded a spectacular jump in profit in Jan-March compared with the same period a year ago.

Bajaj Hindusthan’s profit soared 11-fold to 430 million rupees in Jan-March, while Balrampur Chini saw a 240 percent jump on higher sugar prices and better volumes.

Shares in sugar firms have fallen 20-40 percent in 2008 due to poor market conditions and as the mills in Uttar Pradesh had to pay heavy dues on cane procurement.

Maharashtra-based Shree Renuka Sugars, which rose around 8 percent in the period, bucked the trend on the broader CNX Midcap Index’s 39.50 percent drop.

PROJECTS PAUSED

Some expansion and diversification plans drawn up in better climes are running aground as funds get scarce.

“I think all of them are heavy on debt,” a senior analyst with IL&FS Investsmart said. “Some projects would be delayed. A few of them will not come at all. Lots of things are going to happen in the coming days.”

Bannari Amman Sugars has plans to double capacity at its Karnataka mill and set up a new plant in Tamil Nadu by next year, but raising funds in a tight-liquidity environment is a worry, Company Secretary C. Palaniswamy, said.

“Our debt is very low as of now - 0.2 - but we are on the way to implement some projects for which we are discussing funds. We will be able to implement it on time as we are cash-rich. But we will have problems in raising the money.”

“Higher interest rates would make projects more expensive. We are not thinking about new projects now,” R. Vardarajan, chief operating officer of Rajshree Sugars & Chemicals, said.

“It’s not just interest rates, but higher steel and raw material costs too. We will have to take all this into consideration.”

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