Uttam Sugar Mills

One more joins the race to expand sugar capacity in UP

Promoted by the Adlakha family, Uttam Sugar Mills commenced sugar-manufacturing operations in January 2001 by setting up a 2,500-tonne crushed per day (TCD) plant along with a 6-MW co-generation capacity in Libberheri, Uttaranchal. In the year ended September 2005, the company had a manufacturing capacity of 6,250 TCD and a co-generation capacity of 16 MW.

Uttam Sugar Mills is now coming out with a maiden public issue of 40,00,000 equity shares at a face value of Rs 10 in the price band of Rs 290 to Rs 340. With this issue, the company expects to collect proceeds anywhere in the range of Rs 116 crore to Rs 136 crore.

The object of the issue is to set up two greenfield units to manufacture premium quality white sugar with a capacity of 4,500 TCD and 5,000 TCD along with co-generation of power with a capacity of 15 MW and 30 MW at Muzzafarnagar and Saharanpur in Uttar Pradesh (UP), respectively. Both the units are expected to commence commercial production by October 2006. The units will employ a concept of single sulphitation and re-melt process that is expected to result in production of superior quality sugar as compared to sugar produced by the conventional double sulphitation process.

Uttam Sugar Mills has also received an approval from the Ministry of Commerce & Industry to set up a distillery unit with a capacity of 22,500 kilo liter per annum of alcohol at its Barkatpur facility. Out of the post-expansion co-generation capacity of 81 MW, the company is expected to have a surplus of more than 35 MW and is currently completing arrangements to sell excess power to the Uttar Pradesh State Electricity Board.

The total cost of the two new units is approximately Rs 270 crore and the working capital requirement is Rs 16.70 crore.

The means of financing for the same are as follows:

The snapshot of the current and the proposed capacities of the company are as follows:

Strengths

• Uttam Sugar Mills is one of the few players in the industry to employ the Defeco Remelt Phospho Floatation (DRP) process in its Libberheri unit that results in manufacture of sulphurless sugar. This sugar is preferred by industrial buyers and generally commands a premium over plantation white sugar. The proposed units, too, will employ the same process of manufacturing sugar.

• The Libberheri unit (6250 TCD) is eligible for deduction from income tax under section 80 IC and is also entitled to exemption from payment of excise duties for 10 years with effect from December 2004. This is due to the fact that it is located in the industrially backward region in Uttaranchal.

• Uttam Sugar Mills is also eligible to obtain certain incentives in the form of capital subsidy and reimbursement of the transportation cost of sugar from the UP government. This incentive is available to private entrepreneurs that incur expenditure to set up new production facility or expand the existing facility from FY 2005 to FY 2007. These plants need to commence production by March 2007. It has also set a minimum expenditure of Rs 350 crore to avail this facility. Combining the cost of the Barkatpur plant expansion and the proposed new capacities, Uttam Sugar Mills will also be eligible for the incentives. This is expected to save approximately Rs 1 per kg of sugar sold.

Weaknesses

• Uttam Sugar Mills operates in the western and northern parts of UP and in Uttaranchal where the sugar mills are known to pay more to farmers, either in cash or kind, in excess of the state advised price (SAP) paid. SAP is higher than the statutory minimum price (SMP) fixed by the Central government. This is evident from the fact that for the 2005 sugar season, SMP stood at Rs 74.5 per quintal of sugarcane and SAP was Rs 112 per quintal. However, the actual cost for the company was more than Rs 128 per quintal. Going forward, this is likely to result in higher raw material cost.

• There is a mad rush for setting up and expanding sugar mills in and around UP to avail of the state government’s incentives. This is bound to create excessive capacities and could lead to severe shortage of sugarcane especially when the sugarcane crop in the region falls.

• The promoters have many companies engaged in diverse activities. Plant and machinery for major portion of the proposed units will be obtained from group companies.

Valuation

In the year ended September 2005, Uttam Sugar Mills posted net sales of Rs 187.94 crore and its net profit stood at Rs 26.71 crore. The resultant earning per share based on the post-issue equity capital of Rs 25.77 crore comes to Rs 10.4. The lower price band of Rs 290 discounts the same by 28 times and at the higher band PE ratio stands at just under 33. Compared to the average PE ratio for the sugar industry of around 20 times, the issue is richly priced.