Nov 14, 2008, 01.06 PM IST | Source: CNBC-TV18

Bajaj Hind agrees to pay 2008-09 SAP at Rs 140/qtl

Bajaj Hindusthan has agreed to pay SAP for 2008-2009 at Rs 140 per quintal, reports CNBC-TV18, quoting sources. Bajaj Hindusthan would start 14 mills from November 16, ahead of the November 18 hearing.

Bajaj Hindusthan has agreed to pay the SAP for 2008-2009 at Rs 140 per quintal, reports CNBC-TV18, quoting sources. Bajaj Hindusthan would start 14 mills from November 16, ahead of the November 18 hearing.


According to CNBC-TV18's Varinder Bansal, the people who are anticipating that the decision of the High Court will be heard next week. But what has happened is Bajaj Hindusthan, which is not part of Indian Sugar Mills Association, or ISMA but sources said they had yesterday mentioned that they will be paying SAP at Rs 140 per quintal.


"This is a period of 2008-90 and importantly, one have to remember is that in the sugar industry there is a case still going around for final SAP- for last two years that is 06-07-08. So it makes a bleaker chance of most of the sugar companies; whatever SAP for the last two years will be there, it will be decided by the court and it will be given to it. At this moment it has to be considered that sugar mills are ready to pay Rs 140."


"Sources also tell us that now it is likely that most of the other players in the sugar industry will follow and in a day or two even before the court hearing date, which is November 18, most of the companies like Balrampur Chini , which is the second largest player along with other companies, declaring that they are ready to pay Rs 140."


"The good thing is that the production will start but they will be taking a knock of around Rs 15 per quintal, so this is one important aspect, which has come from the sugar pack." 


SP Tulsian of said since the leader in the industry has succumbed to this pressure there will be more follow-ups. He feels the second would be Balrampur Chini , which has a crushing capacity of 76,000 tonne with 11 sugar mills, followed by Triveni Engineering with 62,000 tonne of crushing per day. "One will see all the mills probably falling inline with maybe Dhampur Sugar Mills , DCM Shriram Consolidated or DCM Shriram Industries all these players because there will be a huge scramble for procuring sugarcane," he said.


Here is a verbatim transcript of the exclusive interview with SP Tulsian on CNBC-TV18. Also watch the accompanying video.


Q: Rs 140 is pretty much inline with what you expected because the last time we spoke you said that most of them were getting prepared to spend that amount?


A: The government announced the SAP (State Advised Price) on October 18 at Rs 140, and then the sugar mill owners protested. At that time also I had said that this is a symbolic protest. If one sees the crop output in Uttar Pradesh, in fact there has been huge damage in the Eastern part because of the flood and so all the producers were worried. But since the UP Sugar Mill Association has taken a stand to oppose that maybe to support their two cases that are pending in the court for 200607 and 200708 at Rs 125. Probably, the protest has been of a symbolic nature but everyone was desperate and seeing that Modi Sugar Mill and Simbhaoli Sugar Mills have already started the crushing.


Bajaj Hindusthan which is the largest player has ten sugar mills with a crushing capacity of 96,000 tonne per day plus another 40,000 tonne with four mills in their subsidiary Bajaj Hindusthan Sugar. So in all they have 14 mills with a crushing capacity of 1,36,000 tonne per day. Apparently, they have informally agreed with their cooperatives and farmers to pay them Rs 140. On the contrary, they have been informally assuring them that if they have any surplus and if other mills are not prepared to buy at Rs 140 they are prepared to because everybody in UP knows that this time crushing will be for a very short span. It will be about Rs 140 or maybe about Rs 145, as against normal Rs 175 to Rs 180.


Moreover, the hearing in Allahabad Court has been adjourned to November 18 and nobody knows whether any interim relief or any outcome will come on the 18th also. So, definitely no mills can wait till then. Sugarcane is being diverted to the jaggery manufactures. So all those things have compelled them and knowing fully well that if they delay the crushing they will ultimately be axing their own feet. Thus, probably realising that Bajaj Hindusthan, which is the leader has agreed to pay Rs 140 which is inline with the SAP announced by the UP government.


Q: Thats the important part because the leader in the industry has succumbed to this pressure. So would there be more follow-ups?


A: Yes, definitely now the second would be maybe with Balrampur Chini which has a crushing capacity of 76,000 tonne with 11 sugar mills, followed by Triveni Engineering with 62,000 tonne of crushing per day. One will see all the mills probably falling inline with maybe Dhampur Sugar Mills, DCM Shriram Consolidated or DCM Shriram Industriesall these players because there will be a huge scramble for procuring sugarcane. As with a delay of maybe even a week, probably, one will lose about seven days production against the estimated production of about 120 to 140. So, right now, price is not really a matter of concern.


One can always fight, and probably now, they may not go to ask for any relief in the Allahabad High Court. While contesting their case they may again go to the apex court and say under due dates they have paid all this money. But this is a sensible commercial decision on part of all the mills at least to start with the crushing because otherwise the estimated production of the country which is now estimated at 21 million tonne while in reality it is not likely to be more than 19 million tonne; it may fall to about 1718 million tonne. So overall commercials, since this is a good decision.            


Q: Where does that leave expectation for sugar in this coming season because obviously they are sourcing raw material at higher price, Rs 140. The expectation is that demand pick up, particularly given that the cycle is in recovery mode or will perhaps be and prices would be higher than Rs 21 kg. So what is the expectation that most manufacturers are working there with?


A: Right now sugar is getting sold at around Rs 17 in UP ex-mill. If one excludes the excise, etc. the net realisation to them is anywhere between close to Rs 16. If one is buying sugarcane at Rs 14 and if just as a ballpark taking 10% as the recovery the cost to them is Rs 14 per kg. Rs 4 is the conversion cost and that adds to Rs 18; they are selling at a Rs 16 at present. But they are realising about Rs 5 from the bye-products, that is molasses and baggas. So in effect they are making profit of about Rs 3 per kg as of today.


But we are expecting that probably from April 2009, when the general elections will get over and when the crushing in UP or rather all over India will come to an end, definitely sugar prices will show a rise of at least about Rs 23 a kg. So that will be the real profit because half of the inventory gets sold after April because they carry the inventory to get sold over a remaining period of time till October or November. So knowing all these things and that commodity cycle will be taking an upturn from April 09 in anticipation of that they have all taken this decision to go ahead with the production.         


Q: Good business decision and from a year perspective some interest in sugar stocks?


A: I think its a prudent and commercially sensible decision. Ultimately, in the larger interest of the country otherwise we would have been short of production and since this is a prudent commercial decision obviously this is very positive for the sugar stocks.


Q: What is your sense going forward? You said post April do you sense that prices could then go to about Rs 20-21 and that additional profit and you would see lot of companies going significantly back into the green?


A: I wont be surprise if the prices cross beyond Rs 20 by April, May or June. By the time festive season demand also starts, I wont be surprise if I see prices breaching Rs 20 in UP and in Maharashtra it could be about Rs 19.


Even as of today by paying Rs 14 and with a realisation of Rs 16 ex-mill, mills are not making losses. They will definitely continue to make profit maybe in the sugar segments they will make losses but that will get compensated by the distillery and the cogen operations. So as of today also they are not losers, but post April 09 definitely I see a sharp recovery. So it qualifies very well for the sugar stocks.


Q: From the upcoming earning season of the sugar industry what are you expecting? What are the numbers that you are looking forward to?


A: Now, for the September quarter majority of the sugar mills have their accounting-year ended on September. So, all of them will be announcing the audited results by December end. In fact, Balrampur Chini is the first company to have taken the lead to announce the results on November 24only inventories getting sold during this quarter. So one has to really look for the results of December quarter where half of the crushing has been or is going to get implemented by the sugar mills and that will be the indication that probably what will be the estimated production and what will be the future scenario going forward. But as I said, taking an overall call, it is very positive for the sector and for the mills.                  



I have holdings in Hindalco and GVK.






Bajaj Hind stock price

On April 17, 2014, Bajaj Hindusthan closed at Rs 18.20, up Rs 0.00, or 0.00 percent. The 52-week high of the share was Rs 21.95 and the 52-week low was Rs 11.70.

The latest book value of the company is Rs 52.77 per share. At current value, the price-to-book value of the company was 0.34.

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