Oct 4, 2006|
Sugar: Sweetness left?
The sugar sector has been in the news in the last two months for all the wrong reasons. Expectations of bumper production have resulted in declining realisations. Sugar prices in the world market are depressed even in the absence of Indian exports. Further, there is also a ban on sugar exports. To add to this, there is the ethanol controversy. In this write-up, we take a look at the changed aspects of the sugar sector and their impact.
Domestic demand-supply situation
Domestic production of sugar for the sugar season 2006-07 is expected to touch 23 million tonnes (MT), an increase of 3.5 MT over the previous year. We expect the sugar industry to start the coming season with an opening inventory of 4.2 MT. The supply of 23 MT during the year would thus result in total availability of 27.2 MT. Even after considering the consumption of 19.6 MT and fulfillment of re-export obligation to the tune of 2 MT, we would end the next season with a closing inventory of 5.6 MT.
Prices: A downward journey
Expectations of bumper production and a ban on sugar exports have resulted in declining realisations. The impact of a decline in sugar realisation by Re 1/kg is substantial, considering that almost 80% of the sugar companies' revenues are still contributed by the sugar segment. Sugar prices have fallen by as much as 18% from June 2006 to September 2006.
Lower realisations and a higher cost of production could lead to a fall in the operating margins of sugar players. The rising cost of cane is the main concern in this regard. In Uttar Pradesh, the state-advised price (SAP) for cane in 2005-06 was Rs 115/quintal, but companies ended up paying around Rs 130/quintal. Also, Uttar Pradesh is slated to go in for assembly polls in February 2007 and this could result in a hike in the SAP for the coming season. However, with cane supply expected to be in abundance in this state in the coming season, we do not foresee any major 'cane war' this time around like the last year.
According to the International Sugar Organisation (ISO), world sugar production will be higher than forecast this year, erasing a third straight annual deficit, as favorable weather in India bolsters harvests. Global output will be 150.6 MT in the 12 months through September 30, up from a May estimate of 149.2 MT and exceeding demand of 149.7 MT. International sugar prices have fallen sharply from more than US$ 440 per tonne to the current level of less than US$ 400 per tonne. The recent cool down in crude prices has also raised concerns that Brazil may not divert sugarcane towards ethanol, leading to higher sugar production.
By-products – a cushion
By-products could provide a cushion to the cyclical impact of the sugar segment. However, uncertainty as regards to the pricing of ethanol would delay the implementation of the ethanol-blending program. Also, sugar mills get 80% to 85% of their revenues from sugar, and as a result, revenues from ethanol will continue to be small (relative to the total) in the near future.
What to expect?
The increased production implies that supply is likely to catch-up with demand comfortably after three consecutive years of shortfall. We expect the crushing season to go till June due to excess cane supply. Hence the recovery and volume will be the factors that will play important roles. Also if the export ban is lifted, it will provide a good opportunity for the sugar companies to export. Therfore efficient players like Bajaj Hindusthan and Balrampur Chini will not be affected in the long run.
More Views on News
Sorry! There are no related views on news for this company/sector.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407