Will Simbhaoli Sugar's power venture be profitable?
Shrikant / 07 Dec 2011
Simbhaoli Sugars has decided to enter the clean power business through a JV with Sindicatum Sustainable Resources Group, Singapore. SSL already has a capacity of 64 MW based on bagasse.
Simbhaoli Sugars (SSL), a Delhi-based sugar company has decided to enter the clean power business through a JV with Sindicatum Sustainable Resources Group, Singapore. SSL already has a capacity of 64 MW based on bagasse. The company uses 30 MW of this capacity for its own plants, while the surplus capacity of 34 MW is tied up in the Power Purchase Agreement with the Uttar Pradesh Power Corporation. SSL now wishes to enhance this capacity to 115 MW in next 18 months through this venture.
In our telephonic interaction with the company's management, the CFO, Sanjay Tapriya, said that SSL has enough land, so it doesn’t require to undertake additional land acquisition for the new capacity. Tapriya also said that company would not require to buy additional bagasse, as it will generate enough for the new capacity. SSL wishes to sell power from the new project to the state electricity boards and aims to make Rs 80 cr in revenues once the project is completed. While its core business is sugar manufacturing, the company is diversifying its operations in the power sector. We are of opinion that this venture may not be very profitable to the company.
For the year FY11, the company sold 63,484 MWh of power at a selling price at Rs 3.91 per KWh to the Uttar Pradesh Power Corporation. Its Power segment contributed Rs 24 cr to the revenues. However, as per its FY11 annual report, its margins declined due to a fall in fuel costs. The current share of power revenues is less than 2% in the total revenues. Assuming that its revenues increase to Rs 80 cr as per the management's expectations, it will still be close to 5%-6% of the total revenues. Given the current scenario of the power sector, we also doubt the assured sale of power in the future. That apart, there are several power plants of larger capacities coming up in North India, which will generate a large quantum of power and will be given high preference in long term Power Purchase Agreements.
In our opinion, the company may require to sell this power through the merchant power route at some time in the future, which will put its profitability at risk. No wonder the investors have shown their sentiment with respect to this development, as the scrip went down by 4.76% today. Besides, the Indian sugar business is highly regulated by the govt., and the company may face some hurdles on that front as well. The scrip is down by 40% on a YTD basis, and we think that the power sector venture may not be a good diversification plan.
In our telephonic interaction with the company's management, the CFO, Sanjay Tapriya, said that SSL has enough land, so it doesn’t require to undertake additional land acquisition for the new capacity. Tapriya also said that company would not require to buy additional bagasse, as it will generate enough for the new capacity. SSL wishes to sell power from the new project to the state electricity boards and aims to make Rs 80 cr in revenues once the project is completed. While its core business is sugar manufacturing, the company is diversifying its operations in the power sector. We are of opinion that this venture may not be very profitable to the company.
For the year FY11, the company sold 63,484 MWh of power at a selling price at Rs 3.91 per KWh to the Uttar Pradesh Power Corporation. Its Power segment contributed Rs 24 cr to the revenues. However, as per its FY11 annual report, its margins declined due to a fall in fuel costs. The current share of power revenues is less than 2% in the total revenues. Assuming that its revenues increase to Rs 80 cr as per the management's expectations, it will still be close to 5%-6% of the total revenues. Given the current scenario of the power sector, we also doubt the assured sale of power in the future. That apart, there are several power plants of larger capacities coming up in North India, which will generate a large quantum of power and will be given high preference in long term Power Purchase Agreements.
In our opinion, the company may require to sell this power through the merchant power route at some time in the future, which will put its profitability at risk. No wonder the investors have shown their sentiment with respect to this development, as the scrip went down by 4.76% today. Besides, the Indian sugar business is highly regulated by the govt., and the company may face some hurdles on that front as well. The scrip is down by 40% on a YTD basis, and we think that the power sector venture may not be a good diversification plan.
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