Creating the country's most profitable sugar mill, the Saraogis are now embarking on an M&A-led strategy.

By Ranju Sarkar

It's a bitter schedule that an average CEO would refuse to digest. But for the energetic joint managing director of the Rs 304.85-crore Balrampur Chini Mills, Meenakshi Saraogi, 53, coming to work after lunch, and working till early the next morning, is routine. It has also yielded sweet results.

Obviously, Saraogi's timings are excruciating for her managers who, often, have to report for work at dawn. But that's the kind of commitment that has made Balrampur Chini the country's most profitable sugar company, with net margins of 13.97 per cent in 1997-98. Admits V.K. Goel, 58, the chairman of the Rs 291-crore Dhampur Sugar: "It is her hands-on attitude which has made the difference."

What a difference too! A few indicators: since 1994-95, Balrampur Chini's turnover has jumped by 104 per cent to Rs 304.85 crore in 1997-98 even as its installed crushing capacity has gone up by 100 per cent to 16,000 tonnes crushed per day (TCD). High on growth, the Saraogis--after acquiring a 51 per cent stake for Rs 13 crore in April, 1998--have made an open offer to acquire an additional 20 per cent in the Rs 36.72-crore Tulsipur Sugar. What next?

Given a choice, Meenakshi's son, Vivek, 31, the other managing director of the company, would like to go on a shopping-spree. First, however, he may increase Tulsipur Sugar's capacity from 2,500 TCD to at least 5,000 TCD with an investment of Rs 60 crore. And he may also explore the possibility of merging it with Balrampur Chini. Later, he is bound to focus his attention on lucrative takeover targets in eastern Uttar Pradesh, with the Saraogis already zeroing in on under-performing units, like the Rs 29.46-crore Indo Gulf Explosives' mill (2,500 TCD) in Meizapur and the Rs 9.20-crore Lakshmiji Sugar Mills' Raja-ka-Sahaspur plant (1,700 TCD).

Balrampur Chini may also be interested in three of the 14 ailing mills owned by the Uttar Pradesh Sugar Federation, but referred to the Board for Industrial & Financial Reconstruction. Understandably so, since they are located in Balrampur's vicinity: Burhwal (800 TCD), Nawabganj (1,500 TCD), and Munderva (1,000 TCD). Says Vivek, who is credited with the company's acquisition-for-expansion strategy: "The M&A route is somewhat easier, and provides us with a semi-developed command area."

Before they do so, however, the Saraogis will have to prove themselves at Tulsipur Sugar. That may turn out to be an arduous task. For one, besides marginal net profits of Rs 16.21 lakh in 1996-97, the company has been affected due to the non-availability of cane. Since only 50 per cent of Tulsipur's command area-- from where it can procure cane as per the sugar regulations--is irrigated, a confident Meenakshi says: "We'll assist the farmers in boring new wells, and encourage them to cultivate cane."

This confidence comes from the fact that she has eliminated the similar constraints that used to plague the Balrampur mill--which she has managed since 1979 as her husband, Kamal Saraogi, is not interested in the business--and the Babhnan unit, which Balrampur Chini acquired in 1990. When Meenakshi landed in Balrampur, only 7 per cent of Balrampur's command area--compared to the average of 15 per cent in western Uttar Pradesh--was under cane cultivation. And the cane-management and procurement systems were inefficient.

For instance, the cane used to arrive at the factory along with dirt and leaves, which resulted in lower sugar production. Moreover, it would either be left in the farms for a long time, or its delivery would be delayed due to lax transporters. This affected the recovery rate--sugar produced as a percentage of the cane crushed by weight--since a 24-hour delay between harvesting and crushing reduces it by between 0.50 and 0.75 per cent. "A total revamp was required," recalls Meenakshi.

That is exactly what she did by investing in 30 trucks and 40 trailers to check the transporters' menace. Not surprisingly, Balrampur Chini's recovery rates have risen to between 10.44 per cent and 9.80 per cent at the Balarampur unit since 1992-93, and between 10.25 per cent and 10.17 per cent at the Babhnan unit. By comparison, the average recovery rate of the country's largest sugar company, Dhampur Sugar, was 9.24 per cent in 1995-96 and 9.73 per cent in 1996-97.

The farmers too gained: payments were made in time, and they were encouraged to grow more cane. Recollects Meenakshi: "While the government insisted on payments in 14 days, we started paying them in 6 days." Agrees Lord Bux Singh, 65, a farmer who owns 20 acres of land in Balrampur: "If they are assured of offtake, farmers prefer to grow cane since it offers the best returns."

Operationally too, the annual crushing season was squeezed at the Blarampur mill--from an average of 180 days in the past to 132 days in 1997-98--through the regular maintenance of factories, and the monitoring of cane-supplies through a wireless communication system. And then, the next growth phase was put into place by Vivek, who believes in economies of scale--and business opportunism.

For example, the company earned a profit of Rs 2.33 crore in 1994-95 by importing sugar when global prices were low at around $395 per tonne (or Rs 13 per kg), and domestic prices went up from Rs 13.50 per kg in May, 1993 to Rs 15 per kg in 12 months. And the government, fearing a shortfall in domestic production, allowed private companies to import sugar.

Similarly, Balrampur Chini was one of the first to privately place 5 lakh of its shares with foreign institutional investors at a premium of Rs 516 per share (face value: Rs 10) in February, 1994. This Rs 26-crore inflow was used to expand the capacity of the Balrampur unit from 2,500 TCD to 3,500 TCD, and to set up an alcohol unit. However, this has come at a cost, especially since the company has mainly resorted to debt to finance its growth since then.

Which brings us to the problem that the Saraogis will face in future. Balrampur Chini's strategy has resulted in a debt-equity ratio of 1.50:1 as its total debt--including cash credit--has climbed from Rs 65.26 crore in 1993-94 to Rs 194.37 crore in 1996-97. Although it is lower than the industry average of 2:1, if the company continues to borrow more money to finance its acquisitions, the burgeoning interest costs--which went up by 560 per cent to Rs 28.66 crore between 1993-94 and 1997-98--could affect Balrampur Chini's profits in the future.

That is bound to hit investor sentiment. Despite the fact that the company has rewarded its shareholders through two bonus issues since 1990, the scrip price has fallen from a high of Rs 900 on May 3, 1994, to Rs 116.8 on June 15, 1998. Still, as the Saraogis crush and consolidate, they may be in the best position to reap the benefits of the new decontrol era in the sugar industry--when it begins.

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