Summary
Traditionally, the
Indian organic chemical industry has been using alcohol as a
feedstock because petrochemical feedstock was not economically
available. The controlled regime of low molasses prices resulted in
these companies making higher profits as compared to global
players. The rise in the prices of the molasses after decontrol in
1993 brought the margins of the companies under severe pressure.
This situation did not last long due to record sugar production in
the last two years, which led to a drastic fall in the prices of
molasses. Following the alignment of domestic petrochemical prices
with international prices, the so-called feedstock advantages has
become a changing phenomenon. The superiority of either route is
decided by the relative price changes in the volatile international
markets.
The financial
performance of the 15 companies in the organized sector reflects
the changes that have taken place. The turnover has grown at a CAGR
of 31% in the last five years. In the same period the post-tax
earnings have increased to around 5%. The high operating profit
margins of 42% in 1991-92 began declining from 1992-93 and touched
a low of 16% in 1993-94. There was a recovery in the last few years
with the OPMs rising to about 25%. In the total costs, raw material
costs (of which molasses contribute around 20-25%) has risen
sharply in the post decontrol era to touch 53%. The sugar glut in
the last two years has reduced this proportion to 48%.
In a 'survival of
the fittest' game, many companies are going to be edged out of the
race many others will have to restructure operations. Though the
importance of this class of chemicals cannot be undermined, the
future appears turbulent .The industry's long-term risk profile has
changed as the prices of the feedstock based on the output of
sugarcane have become volatile. With the drastic reduction in the
import duties on various alco-chemicals, the domestic producers
will have to compete with the manufacturers using the petrochemical
route.
