The announcement to exempt 60 per cent of the output from jute packaging has provided a breather to the sugar industry. Earlier, under the Jute Packaging Materials Act, 1987, sugar manufacturers had to package the entire produce in jute bags.
The new norms would lead to savings of about Rs 0.40 a kg for sugar manufacturers. This accounts for two to seven per cent of the earnings before interest, tax, depreciation and amortisation and 4-11 per cent of profit before tax estimates, said Achal Lohade at JM Financial Institutional Securities.
Jute bags cost about Rs 35 a 50-kg bag, which translates into a packaging cost of Rs 0.70 a kg. High-density polyethylene (HDPE) bags cost much less — a 50-kg HDPE bag costs Rs 15, and the packaging cost in this case is Rs 0.30 per kg. Therefore, a shift to HDPE bags would result in savings of Rs 0.40 a kg for sugar producers. Assuming production is 25 million tonnes and the entire produce is packaged in HDPE bags, total savings for the industry would stand at Rs 1,000 crore. However, since the government has allowed HDPE bags for only up to 60 per cent of the produce, the industry’s savings would stand at Rs 600 crore.
Lohade estimates production for Bajaj Hindusthan, Balrampur Chini and Shree Renuka in FY14 at 11,73,543 tonnes, 11,73,543 tonnes and 4,60,000 tonnes, respectively. The savings for these companies would be Rs 28.2 crore, Rs 21.2 crore and Rs 11 crore, respectively.
Lohade also estimates Balrampur Chini's profit before tax in FY13 at Rs 235.7 crore. He pegs Shree Renuka's profit before tax at Rs 174.8 crore, while Bajaj Hindusthan is likely to see its profit before tax fall. The cost saving on sugar packaging would account for 9.1 per cent of Balrampur Chini's profit before tax.