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Sugar: Still a sweet story?

Jun 28, 2006

The stock markets continue to face tremendous pressure. The fall in stocks across sectors and categories over the last few sessions has been painful for retail investors. Sugar stocks have been one of the worst losers in the recent falls. However, despite the fall in stock prices, the sugar story is still ‘sweet’ from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations. In this write-up, we take a look at some of the factors that have the potential to lead the sugar industry on a higher growth trajectory in the future.

StockPrice on 10, May Price on 27, May% change
Bajaj Hindusthan529363-31.4%
Balrampur Chini196113-42.3%
EID Parry296200-32.4%
Sakthi Sugars259160-38.2%

Supply deficient: The sugar industry is expected to grow strongly in next two years, mainly on the back of low stock-use ratio. The industry will again face production shortfalls in the year 2006, with inventory filling the gap for the third year in a row. The difference between the production and consumption has reduced the inventory levels, from 11.3 MT in 2002 expected to go down to 3.5 MT in 2007. Also, the stock consumption ratio, which was around 67% in 2002, has reduced to 17% in 2005. this, we believe, have a positive impact on sugar prices.

mn/tonne20022003200420052006E2007E2008E
Opening stock10.711.311.68.54.53.33.5
Production18.520.11412.517.52123.5
Imports  0.421  
Total supply29.231.426232324.327
Consumption16.818.317.318.519.219.820.6
Closing stock11.311.68.54.53.33.55.4
Closing stock/consumption (%)67.3%63.4%49.1%24.3%17.2%17.7%26.2%
source : ISMA

Consumption performance: Sugar consumption depends on population growth and per capita consumption, and has increased at a CAGR of 4% in the last 5 years. We expect the consumption to clock similar levels of growth in the future. Per capita consumption for sugar is around 18 kg in India, which is one of the lowest in the world. With growing population, the demand for sugar is expected to go up.

Ethanol story: Currently 5% blending is allowed by 10 states in India. Adoption of the same by other states will ensure better realisations for the by-products. If blending ratio is increased to 10%, this will further boost the revenues of sugar companies.

By-products: Apart from ethanol, power, molasses, rectified spirit also generate revenues for sugar companies. Indian manufactures stand to gain from the integrated model. For example, in FY06, Balrampur Chini earned 86% of its revenues from sugar, while the remaining came from the power and distillery divisions.

Visible capacity expansions: Most of the sugar companies are expanding their capacities. Bajaj Hindusthan is taking its crushing capacity from the current levels of 56,200 TCD to 1,00,000 TCD in the next 2 years. Balrampur Chini is not too far behind. It is also increasing it capacity from 47,500 TCD to 70,500 TCD during this period. These companies are also expanding their distillery capacities in anticipation of higher ethanol demand.

Conclusion
The sugar industry in India is supply-deficient, with production shortfalls being met out of past years’ inventory and imports (though miniscule). Also, the sugarcane cultivation currently occupies only 2.7% of the cultivable land in the country and that the per capital consumption of sugar is low, there exists a huge potential for the sector to grow strongly in the future. The companies are also gradually transforming themselves from being conventional sugar mills into multi-product businesses by realising the potential of value added revenue streams from ethanol manufacturing and power co-generation.


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