Shishir Bajaj-promoted Bajaj Hindusthan, India's largest sugar producer, is in talks with its nearest competitor Balrampur Chini Mills to acquire the 36.67 percent stake of the current promoters, the Kolkata-based Saraogis.
Although the managements of both companies denied the development, industry sources confirmed that the two promoters have been in discussions to finalise a deal. "While the two companies are trying to work out a deal, it is not certain whether the deal will reach a conclusion. The Saraogis are certain to press for a steep valuation since the sugar business is performing excellently," said industry sources.
Vivek Saraogi-promoted Balrampur Chini owns 10 sugar mills, all located in east Uttar Pradesh. Bajaj Hindusthan group runs 16 sugar mills, all of which are located in UP.
As about the discussions, Saraogi said, "Nothing has happened. I am not going to comment on speculation," adding, "Can't two business companies in the same sector meet to discuss future strategies?" A Bajaj spokesperson said there was no such proposal.
With reports of a possible deal, the Balrampur share price touched a 52-week high of Rs 167.30, but closed at Rs 149.30, down 2.13 percent. The share, however, has gained 8.42 percent over the past week though the market remained sluggish. Bajaj Hindusthan on Friday lost 6.08 percent to close at Rs 196.25.
Analysts pointed out that at the current valuation of Balrampur Chini, Bajaj may have to fork out over Rs 2,000 crore to buy out the promoter's stake. "However, Bajaj Hindusthan already had a debt of Rs 3,000 crore on its balance sheet and it would be challenging for the management to raise this amount," said an analyst.
Other sources said the two companies have held preliminary talks, which are stuck on valuation.
Industry experts also said the recent move by the Union government to make sugarcane prices for mills uniform across the country has made the sugar business in UP attractive. So far, the UP mills were at a disadvantage to those in states like Maharashtra because they were required to pay a state-declared price for sugarcane, which was substantially higher to the central government declared prices in Maharashtra.
The sugar cycle is in a boom after two years and prices are ruling at an all-time high owing to a widening demand-supply gap. Domestic output touched a three-year low of 15 million tonnes in the 2008-09 season (October-September) against consumption of 22 million tonnes. Most companies are selling sugar at an ex-factory price of Rs 3,000 a quintal, almost double last year's realisation. Output in the current year too is expected to be 15 million to 16 million tonnes.
Most companies have reported a sharp jump in profitability. Shares of most sugar companies are touching a new 52-week high every day. Bajaj Hindusthan reported a net profit of Rs 60.1 crore for the quarter ended June 30 against a loss of Rs 35.4 crore in the corresponding quarter of the previous year. Balrampur Chini reported a 294 percent jump in net profit to Rs 66.3 crore. The profit rose even as net sales dipped.Despite the improved realisation and outlook, the sugar industry is not in a position to expand since sugarcane availability has declined over past two years owing to irregular payments by mills.