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January 06, 2007

When the sugar cycle turns...

Businessworld has an article on how Coimbatore-based Sakthi Sugars has successfully riden the upward cycle in sugar prices and how it is preparing for the next inevitable downturn.
It recorded a turnover of Rs 1,003.8 crore and net profits of Rs 94.1 crore in FY 2006 (July 2005-June 2006). It would, therefore, appear surprising that Sakthi Sugars is hell bent on diversifying and reducing its dependence on the sugar operations. The answer lies in the fact that sugar is a cyclical business and the boom could end soon. “It is a 2-4-4 phenomenon,” says M. Manickam, managing director, SSL. This means two years of boom, four of normal business and four of downturn. If Sakthi Sugars wants to show a healthy bottom line, it needs to cut down its dependence on sugar before the cycle turns downwards.

To be fair, the company had realised the need for diversification as early as the 1980s when it tried to get into auto ancillaries business through its subsidiary Sakthi Auto. The logic: when the harvest is good, reap rich dividends; when it is not, offset the losses with the other business. However, it didn’t work out well enough. Hence, SSL’s second go at diversification.

...Manickam agrees that SSL should have gone in for value addition much earlier. “It would probably have made a huge difference if we had more co-generation units three years ago.” SSL also went in for a Rs 400-crore corporate debt restructuring (CDR) scheme in 2003. It restructured its interest rates in September 2006 and refinanced loans at below 10 per cent from the 12.5 per cent it was shelling out earlier. The interest was a drag on its finances and the move will result in a saving of Rs 8 crore-9 crore a year. The debt equity ratio is still a worrying 2.5:1, but the company is targeting a more acceptable 1:1 level in three years.

Arun Natarajan is the Founder of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.