Sugar Sector

We have seen sugar stocks correcting in last 7–8 days, which has made even the investors, who have kept view till March 10, get disturbed. Traders are also disturbed, which is expected of them. Infact, sugar stocks have been rising continuously for last 2 months and that has raised the expectations of the investors and traders, expecting the same trend to continue. Expecting this, even the behaviour of sugar stocks were linked with Sensex and Nifty, and questions were raised in last 7 days that why they are not moving up, inspite of benchmark indices going up? When it was converse, nobody really asked this question.

To cut the long story short, bullish tone of sugar sector will continue to remain on domestic as well as global front. Season 08-09 will be ending on 30th September, 09, in which, the estimated domestic sugar production is expected to be 146 lakh MT. We had an opening stock of about 80 lakh MT on 01-10-08 and had an import of about 30 lakh MT in this season. This has made available, an aggregate quantity of 256 lakh, in the country against our estimated consumption of 230 lakh MT, thus leaving an expected closing stock of 26 lakh MT, on 30-09-09.

In season 09-10, India’s domestic production is not likely to exceed more than 140 lakh MT, lower than what we had in season 08-09. The reason for lower sugar production, in this year, could be diversion of sugarcane for Gur and Khandasari, as also about 10% of the crop going for seeding, as more planting of sugarcane will be done by the farmers, due to better realizations expected for sugarcane. Though poor monsoon will also have marginal impact on lower production of sugarcane in coming season, but won’t be seen to have much impact in Karnataka, Tamil Nadu, U.P. and Maharashtra. It may affect, to some extent, in Andhra Pradesh.

So, Season, 09-10, with opening stock of 26 lakh MT and expected production of 140 lakh MT is estimated to have a deficit of 70 lakh MT, expecting the consumption to be at 236 lakh MT. Obviously, closing stock requirement of atleast 20 lakh MT has not been considered in this deficit. This shortfall can only be made good by import of raw- sugar.

To meet this shortfall, some of the mills have contracted to import raw-sugar, which will be seen arriving mainly in the coming season, as it is not likely to be more than 30 lakh MT in this season. Renuka has contracted to import 150 lakh bags, at an average rate of Rs. 19 per kg., Sakthi about 90 lakh bags at Rs. 20 per kg., Bajaj Hindustan 70 lakh bags at Rs. 23 per kg., Balrampur Chini about 8.50 lakh bags at Rs. 21 per kg, Dhampur Sugar about 21.50 lakh bags at Rs. 23 per kg, Dharani Sugar about 20 lakh bags at Rs. 22 per kg, Simbhaoli Sugar about 13.50 lakh bags at Rs. 22 per kg, Triveni Engg. about 10 lakh bags at Rs. 22 per kg and EID Parry about 20 lakh bags at Rs. 22 per kg, for its standalone refinery, in 50:50 JV with Cargill. The cost of refining is Rs. 3 per kg, with 5% processing loss, would add about Rs. 4.50 to Rs. 5 per kg, to the cost of white sugar of all these companies.

Earlier, these raw sugar, post refining could have been sold in the market within 3 months, which has now been reduced to 1 month by the government, to keep the check on the rising price of sugar. Due to this, for September 09, Renuka and Sakthi has been given a release quota for levy, of 8 lakh bags each. Dharani has been given of 1.70 lakh bags. This is over and above the normal release of levy and non-levy manufactured sugar. Also, this non-levy monthly quotas have also been made mandatory to be released in equal parts, in first and second half of the month. Due to this, sugar prices have corrected from Rs. 33 per kg, ex-mill, in U.P. to about Rs. 30 per kg, now.

Due to this, the Indian sugar companies have also stopped contract to import raw sugar from global markets due to which, raw sugar prices fell from 24 cents per pound to 20 cents per pound and of white sugar from $ 610 per MT to $ 510 per MT. However, now it has been moved back to 22 cents per pound for raw and $ 540 for white. Even 3 months white futures is ruling at $ 574, while for raw, it is ruling at 22.75 cents per pound.

As stated above, due to release of higher quantity of imported sugar, for September, these companies will have a profit of atleast Rs. 10 per kg and hence Renuka and Sakthi is likely to have a pre-tax profit of atleast Rs. 80 crores each, for this month, in addition to gain to be made on normal sale of inventory held by them. So, September 09 quarter, will show huge improvements in the bottomline of all these sugar companies.

Though this move of the government is not seen pragmatic by the mills, as the similar move was taken by the government in April 09, whereby all the buffer held by the government, were released, to keep an artificial check on the sugar price, ahead of elections. Effect of this was seen later, with sharp rise in sugar prices. So same thing may get repeated in March 10, once the crushing stops in U.P., Maharashtra, Karnataka and A.P.

There is not going to be much comfort on the domestic front, even for season 10-11, as estimated production of sugar is not likely to be more than 240 lakh MT, which will take care of our domestic consumption only. So India will continue to be an importer for the next 2 years.

Even on the global front, for 2009-10, production is likely to be 152 million MT against estimated consumption of 157 million MT, thus depleting the closing stock to an all time low of 20 million MT, which is equivalent to 45-50 days only.

The government is also not likely to hurt the mills in coming period to ensure adequate availability of sugar in the market. In view of increase in MSP of wheat and rice, it has become unviable for the farmers to move to sugarcane, unless Rs. 180 per quintal is paid to them, against Rs. 160 per quintal having paid by the mills in U.P. in this season, inspite of SAP having been fixed at Rs. 140 per quintal. So low sugarcane price will keep the deficit continuing, which government would not be interested to see and happen.

Hence, all this correction in the sugar stock prices are temporary in nature and looks to have reached its near term bottom. Those who have 6 months view, can look to buy Renuka, Sakthi, EID Parry, Ugar, Dharani and Balrampur Chini, without taking day to day calls.

Source: www.premiuminvestments.in (By S. P. Tulsian)