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The overall outlook seems bleak due to widespread losses in the overall commodities sector on increased risk aversion among commodity investors on the back of the debt crisis in the euro zone. However, the recent initiatives taken by the central government to compensate millers on subsidised sugar is likely to offset some of the losses accruing to sugar manufacturers, analysts say.
Mills benefit
Last week, the government approved a hike in provisional levy on sugar prices for the ongoing October-September sugar season, increasing it by around Rs 4 per kg from last season’s average provisional price of Rs 13.06 per kg.
“Depending on the inventories, mills may benefit on levy realisation. In a way, rise in levy offers support and indirectly suggests that current prices have been lower especially ahead of Ramzan,” Anand James, chief analyst at Geojit Comtrade, said. “Open market prices may not get much of a lift because the government’s quota release has been on the higher side after factoring in higher imports.” Levy sugar prices paid to mills had remained unchanged at Rs 13.06 a kg from 2003-04, despite rise in cane prices.
Production a dampener
India is the world’s second largest producer and top consumer if sugar. The industry is expecting an output of approximately 18.70 million tonnes this year. In addition to this, Indian millers are likely to import 5.50 million tonnes of sugar during the same period. It is reasonable enough to meet domestic demand of around 22.50 million tonnes.
Big global players such as Brazil and Kenya are also expecting good production this year. The surplus production across the globe may put the sweetener’s price under pressure.
“Prices are weak on the expectation that Brazil’s sugarcane output will remain 604 million tonnes this year, compared with 541 million tonnes last year” said Basant Vaid, senior research analyst at Bonanza Portfolio.
According to a report from NCMSL, Kenya forecasts sugar production to rise between 10-15 per cent this year from a record 548,207 tonnes in 2009 as good weather improves sugarcane production.
“If we compare the estimated consumption and availability of sugar in 2009-10, it is in surplus. Sugarcane and sugar production in India typically follow a six to eight-year cycle, where three to four years of higher production are followed by two to three years of lower production. After two consecutive years of declining sugar production in the year 2007-08 and 2008-09, production surged in 2009-10, and is set to gain strongly in the financial year 2011. Crop sowing for the new 2010-11 sowing season in the major growing areas is almost complete” said Amar Singh, head of commodities at Angel Broking.
Lucrative deal
Domestic Sugar production rose this year on the back of lucrative prices offered by the sugar mills that have encouraged farmers to bring in 9 per cent more land into cultivation. Along with it, expectation of timely and normal monsoons in 2010 will give a push to the yield of sugar as well.
However, during May, the country’s sugar inventory was reported at 11.40 million tonnes, 36 per cent lower than 17.80 million tonnes a year ago.
On movement of sweetener, analysts say that likely firm Asian demand due to strong economic growth of Asian countries will be a key factor in deciding the price of sugar in the year 2010-2011. Also, the millers and traders of sugar in India want the government to make efforts to curb the continuously falling prices, which are badly affecting their profit margins.
Report card
For the quarter ended March 31, 2010, Shree Renuka posted a net profit of Rs 195.90 crore, up 712.86 per cent, against Rs 24.10 crore in the corresponding quarter a year ago.
However, other major sugar millers were not as lucky.
Bajaj Hindusthan, Balrampur Chini and Dhampur Sugar posted a net profit of Rs 31.79 crore (down 60.94 per cent), Rs 27.55 crore (down 58.38 per cent) and Rs 12.38 crore (down 29.34 per cent), respectively, compared with the year-ago period.
Sudip Bandyopadhyay, managing director and chief executive officer, Convexity Solutions, said the government’s decision to reduce levy sugar quota and increase compensation for subsidised sugar will help sugar producers. However, the drop in sugar prices will harm bottom lines, he said.
On top line basis, Shree Renuka’s figures stood on the top. The company posted 380.41 per cent growth in net sales followed by Dhampur Sugar (up 165.38 per cent), Sakthi Sugars (up 145.66 per cent) and Simbhaoli Sugars (up 118.36 per cent).
Outlook
Systematix Shares & Stocks in a report said, “We do not expect domestic sugar prices to have too much downside from the present levels until the middle of December when the high cost inventories of sugar season year 2010 will get exhausted and the expected lower cost fresh sugar of the season year 2011 will be available in the market. We expect the sugar players to absorb losses on account of the sale of high-cost sugar inventory until then; contrary to the supernormal profits they recorded in the initial part of the year. However, we expect the realisation and margins from by-products to balance the overall performance to an extent.”
Good monsoons will support the growth of the cane compared with the poor monsoons in the previous year. The first official figures regarding cane acreage will be known only by July, Angel’s Singh said.
Stock performance
Among the 15 major sugar stocks on the basis of market capitalisation, Bajaj Hindusthan was battered the most— 44.94 per cent in the past one year followed by Ugar Sugar Works, Balrampur Chini, Rajshree Sugars and Bannari Amman Sugars, which lost around 26.65 per cent, 23.84 per cent, 15.88 per cent and 10.26 per cent, respectively, during the past one year.
In contrast, Dharani Sugars gained the most by 62.50 per cent in the past one year, followed by EID Parry, Thiru Arooran Sugars, GMR Industries and JK Sugar which jumped 54.73 per cent, 54.58 per cent and 17.57 per cent and 10.68 per cent, respectively.
“We don’t expect any firework in sugar stocks this year. Last year, the situation was totally different from this year. The expectations that cane production will be bumper this year across major cane producing countries may have bearing on sugar prices. And unlike last year, sugar prices may drop this year and have a negative impact on sugar stocks,” said Bandyopadhyay.
Balrampur Chini, Shree Renuka and Bajaj Hindusthan are likely to be key beneficiaries of the change in levy sugar prices. Balrampur Chini has booked levy sales at Rs 13.84 per kg in the first half of the year 2010 (H1FY10).
Hence, the second half of the year 2010 (H2FY10) results will account for the entire benefit accruing to the company due to the ruling.
“Shree Renuka would benefit by around Rs 32 crore because levy is only applicable on sugar produced through cane crushing and not raw refining. The levy sale component of Renuka is low compared to its production estimate of around 1.7 million tonnes. Bajaj Hindusthan has been booking levy sales at Rs16 per kg in H1FY10, based on its interpretation of minimum prices based on necessary changes due to FRP (fair and remunerative price).
Therefore, the actual benefit to Bajaj Hindusthan will be lower in H2FY10 compared with Balrampur Chini and Shree Renuka Sugars, which have been booking levy sugar at the old prices,” according to a report by Motilal Oswal. zz
(With inputs from Amit Mudgill)
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Not a good buy for long-term investors
Deven Choksey
Managing director,
K R Choksey
The recent measures by the government to increase prices of subsidised sugar and drop the levy quota will definitely help sugar mills.
The sugar millers are already paying high prices to farmers for cane and thus their margins are under pressure.
However, it will be difficult to say whether the government’s move may help offset the drop in sugar prices in the light of the bumper cane production expected this year.
Sugar prices are likely to head downward, which is a negative for
the sector.
Investors should not pick up sugar stocks with a long-term perspective as the sector is cyclical in nature.
 Limited.JPG)
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