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Haunted by the past

Ponni Sugars is desperate to grow and has the cash to do so. But the management needs to think big and change its mindset.

N. Madhavan | Print Edition: July 11, 2010

For the past few years, every time the Board of Directors of Ponni Sugars (Erode) Ltd, or PSEL, has met, the most important item on the agenda-apart from current performance-has been growth, growth and growth. Not surprising, considering that this professionally-run sugar mill with a capacity of 3,000 tonnes of cane crushed per day, located in west Tamil Nadu, is almost debt-free and it is sitting on cash reserves and surplus of over Rs 75 crore.

That and debt could easily have it invest Rs 300 crore on an expansion to double its current production. PSEL's urge to grow is also spurred by the fact that it is a single location, one-mill company without add-ons like a distillery and co-generation facility, and so all the more vulnerable to the sugar cycles. "We want to grow. That is the only way we can meet the expectations of the company's shareholders and other stakeholders," says N. Ramanathan, Managing Director of the listed company, which has a 43 per cent public shareholding, with 45 per cent held by the promoters, including Seshasayee Paper & Boards.

But, despite the management's firm commitment to growth, PSEL has been unable to expand. "What is standing between the management and growth is the opportunity or rather, the lack of it," explains Ramanathan.

PSEL cannot expand at its current location, Pallipalayam in Namakkal district, because there's not enough sugarcane around it to feed the new capacity. Like every other sugar mill, PSEL has to buy its sugarcane from a "command area" or cane-growing area around it earmarked by the state government. And PSEL's command area cannot grow any more sugarcane.

Almost to keep itself busy PSEL is spending Rs 95 crore to set up a 19-MW co-generation plant to make good use of bagasse, the waste left after cane crushing. It has plans for a distillery too. Both are usual sugar mill businesses, and it is not keen to get into unrelated areas. The company can't expand at another location in the state, because practically all sugarcane-growing areas have been earmarked for one sugar mill or the other.

In fact, in 2006, when the state government carved out new command areas to allow some more sugar mills to come up, PSEL fought very hard to get an area allocated to it. But it was up against players many times its size and lost out. "Today, there is virtually no promising location in the state for putting up a new sugar mill," says Ramanathan.

Acquisitions are also not an option for PSEL. Most private sector mills in the state are several times its size, and the state government is in no mood to sell the loss-making co-operative and public sector mills that are otherwise ideal targets. Some opportunities did come in neighbouring Karnataka and Andhra Pradesh in the early part of this decade but PSEL was not financially strong enough at that time to grab them.

While there may not be many options for growth in south India, what the PSEL management has chosen to consciously ignore are the opportunities that are available in the north-in Uttar Pradesh and Bihar. There is a reason for this: The Ponni Sugars Orissa misadventure in the 1990s, which almost sank the company. "I agree there are opportunities in UP and Bihar but we do not seem to have the risk appetite any more," admits Ramanathan.

In the early 1990s, the company, then known as Ponni Sugars & Chemicals Ltd, decided to enter Orissa. That was the time when its Erode unit (five years into operation) had paid off all its debt and was sitting on surplus cash. Ponni could not expand within Tamil Nadu as the government had reserved sugar manufacturing for co-operatives and the public sector. But the Orissa government was inviting private sector participation in the sugar sector. In many ways, Orissa was an attractive location for sugar investment.

It had just four sugar mills and thus a large command area was available for the taking. Compared with Tamil Nadu, Orissa gets plenty of rain and has perennial rivers-crucial for sugarcane, a water-guzzling crop. More importantly, the whole of eastern India was sugar-deficit and the sweetener's price in the region always commanded a premium over other markets.

Even so, before putting its money in Orissa, Ponni Sugars decided to take up a co-operative sugar mill at Bargarh in western Orissa in 1991 on a 16-year management contract. In the very first year of the contract, the mill successfully managed to crush 1.30-lakh tonnes of sugarcane as against its earlier average of just 50,000 tonnes. "That was our bad luck," says Ramanathan. Emboldened by the good availability of sugarcane, Ponni began in 1992 to invest in a sugar mill at Bolangir, just 100 km from Bargarh.

When the plant began operations in 1994, Ponni's dream run ended. The mill faced a huge sugarcane shortage as the farmers in the area were reluctant to grow the crop. In the first year, sugarcane availability was just one per cent of the requirement-against the usual 10 per cent when farmers first start growing cane. In the second year it was 10 per cent, third year 25 per cent and then it settled at just 40 per cent from the fourth year-just when sugar mills typically reach full capacity use. With unviable crushing levels, the unit began to incur losses.

To ensure higher sugarcane availability, the company spent another Rs 20 crore on setting up lift irrigation systems for the farmers. "It was like throwing good money after bad. We had put up the plant and we desperately needed the raw material," says Ramanathan. But by 1999, it was clear that nothing was working and the total cost of the project had shot up to Rs 120 crore. Ponni Sugars' management realised that it had erred on many fronts.

The timing of the expansion could have been better. India had just liberalised and the latent demand from industry had pushed up capital cost by 25 per cent and interest cost by 50 per cent. The first five years of the Bolangir unit's operations also coincided with a downturn in the sugar industry. Ideally, it made sense to set up smaller capacity first and then ramp up, but government rules did not permit that. "Using Bargarh as a dip stick to enter Bolangir was another big mistake," rues Ramanathan.

The continuing losses at Bolangir began to drag down the profitable Erode unit, too. The company had to take a decision before it was too late. It formally segregated the two units via a demerger. In 2001, Ponni Sugars split into Ponni Sugars Orissa Ltd. and PSEL. Being a profitable unit, PSEL took a larger proportion of the debt. Ultimately, banks took over Ponni Sugars Orissa Ltd. and sold it to recover its dues.

Thanks to the revival in the sugar industry since then, PSEL has cleared all its debt. In 2009-10, it reported a profit of Rs 37 crore on revenues of Rs 255 crore. It can't be in a better position to grow. Today, the world, for erstwhile Ponni Sugars and now PSEL, has come full circle. That seems to be the catch. The management finds it difficult not to relate the current situation with that in 1991 when the company was in a similar state and made the decision to enter Orissa. It fears another Orissa, if it enters UP or Bihar now.

 COMMENTARY-1

Look for a strategic partner

V. Ranganathan, Partner, Ernst & Young

Sugar industry in India suffers equally from the vagaries of weather and political interference. Unlike most other industries, its scalability in the same location and horizontally across different geographies is highly constrained. This industry is a continuing aberration in the present economic environment.

Essentially, most sugar companies operate in a single state. In the current case study, the reluctance to diversify to a different state/location may be more on account of the political dynamics to be handled, than the scar of a past wound. While it may be incorrect to second guess the management, which is more competent to decide in this matter, the following options can be considered for ensuring growth:

  • Since the company has enough cash, after setting apart the requisite amount to meet the cyclical downsides, it can consider an approach to buy back the public (non-promoter) holding, de-list the company and then invite private equity, as appropriate, to undertake expansion into new areas. This strategy will help Ponni Sugars Erode Ltd. to undertake a level of risk which may not be possible for a public-listed entity.
  • Look at a strategic partnership with a large player (from a different state) for a common facility in a congenial state for the risk and reward to be duly shared.
  • Look at a merger/equity swap with a large player so that both entities benefit from geographical de-risking and share a larger cake. (The way Bharti Airtel and MTN wanted to but could not.)

It is, without doubt, not an easy decision to make.

 COMMENTARY-2

Forget the past and move on

Prof. Bala V. Balachandran
Founder & Dean, Great Lakes Institute of Management

Though the past has been difficult for Ponni Sugars Erode Ltd. (PSEL), it needs to move on. All regions in India are not the same and uncertainties are inevitable in business. What happened in Orissa may not necessarily happen in Uttar Pradesh or Bihar. On the contrary, even if Orissa had been a success, it does not guarantee success for PSEL's forays into other regions.

At a time when companies are resorting to inorganic growth and diversification into unrelated areas to sustain their rate of growth, PSEL should not hesitate to exploit the organic growth opportunities that have come about in UP and Bihar. Once you have burnt your fingers, memories do linger. The company should look at the Orissa fiasco as an opportunity to learn some hard lessons and correct the mistakes made earlier. A more detailed due diligence and the lessons from the past should ensure success for PSEL's future endeavour.

Growth for PSEL can also come by other means. Sugar is a vital industry. The most crucial element of the industry is the availability of sugarcane, which is fast turning scarce. PSEL can look at extracting sugar from beet-like it's done in the United States. Beet consumes less water and is healthier. PSEL can market its sugar then as a healthier option and thus benefit from better realisation. It can also look at organic sugar, which is a big hit in the United States. Export realisation can be at a 200 per cent premium.

Keeping the money sitting in the bank instead of deploying it efficiently will be an open invitation for unfriendly takeovers from players who have very short-term outlook. What PSEL needs to do now is to identify the growth path, plan efficiently, take calculated risks and go after opportunities.

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