Sugar: Bitter times! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Sugar: Bitter times!

Dec 21, 2006

The sugar sector has been one of the biggest underperformers in last four months and while bull- run has gripped most of the other sectors, a wave of the opposite kind has been flowing across the sugar sector. An unclear view on sugar export, expected surplus of sugar and falling domestic and international prices seem to be the major culprits here.

Company Price on Price on %
Dec 20, 2006 (Rs) Jun 14, 2006 (Rs) Change
BSE-Sensex 13,332 8,929 49.3%
Bajaj Hindusthan 227 254 -10.6%
Balrampur Chini 85 97 -12.4%
EID Parry 132 173 -23.7%
Oudh Sugar 91 104 -12.5%
Dwarikesh Sugar 90 98 -8.2%
Rajshree Sugars 83 92 -9.8%
Renuka Sugars 452 666 -32.1%

Domestic Sugar production: Domestic sugar supply is expected to be around 23 million tonnes (MT) in season 2006/07 and 24 MT in season 2007/08. The domestic demand will be between 19.5 MT and 20.5 MT during the same period. As a result, the closing inventory is expected to be around 3.5 MT and 6 MT (after accounting for exports and imports) at the end of season 2006/07 and 2007/08 respectively. It has been historically seen that inventory levels of more than 4 MT have kept the sugar prices under pressure. Sugar prices have tumbled more than 8 % over the past month in the domestic market on account of the higher release of non-levy quota sugar by the government and the expectation of a bumper production. Sugar prices have fallen by Rs 130 to Rs 150 a quintal, on an average, over the last month in the country. At present, sugar is selling at Rs 1,680 to Rs 1,720 a quintal. Though the sugar prices are lower than the highs of Rs 1,900 a quintal, we expect sugar prices not to fall further and stabilize at the current levels

mn/tonne 2003 2004 2005 2006E 2007E 2008E
Opening stock 11.3 11.6 8.5 4.7 3.3 6
Production 20.1 14 12.7 19.1 23 23.9
Imports - 0.4 2 - - -
Total supply 31.4 26 23.2 23.8 26.3 29.9
Consumption 18.3 17.3 18.5 19 19.5 20.6
Exports 1.5 0.2 - 1.5 0.8 -
closing stock 11.6 8.5 4.7 3.3 6 9.3
closing stock/consumption (%) 63.4% 49.1% 25.4% 17.4% 30.8% 45.1%
Source -ISMA

World scenario: World sugar production for 2006/07 marketing year is being forecasted at 155.2 MT, up 6 MT from the May 2006 forecast and up 10.5 MT from 2005/06. Consumption is forecasted at 146 MT, up 3.2 MT from the year earlier. World production from the previous year was mainly due to higher production in Brazil and India at 30.9 MT and 23 MT respectively ( both up 4 MT), followed by China at 11.2 MT, up 1.8 MT, and Thailand at 6.3 MT, up 1.5 MT. Global sugar prices have fallen from an average of US$ 400 per tonne when the ban was imposed to US$ 349 a tonne now.

Exports- A lost opportunity: Earlier, on June 22, while reviewing the price situation in the country, the Cabinet Committee on Prices had taken a decision to ban exports of sugar to curb prices and check inflation. Consequently, the commerce ministry issued a notification on July 3 imposing a ban on sugar exports until March 31, 2007. Global sugar prices have fallen from an average US$ 400 a tonne when the ban was imposed to US$ 349 a tonne now. Yesterday, the Union Cabinet has decided to allow sugar companies with export obligation under the Advance Licence (AL) scheme to undertake exports. However, it has not been disclosed when the companies could start their export shipments. Further review of the situation would be made before the ban is completely lifted.

Sugar companies had imported about 2.6 million tonne (MT) of raw sugar between 2002-03 and 2004-05 seasons (October-September) under the AL scheme. Under this scheme, companies have to re-export one tonne of white sugar against every 1.05 tonne of raw sugar imported within a period of two years. Of the total amount, about 1 MT has been exported so far. With this relaxation, the remaining quantity of 1.6 MT can be exported. This will provide some kind of relief to the sugar companies, as with the surplus expected in the country, the domestic prices had been declining in the recent past. Though there are talks that the government may lift a ban on sugar exports between Dec. 18-21, tough times seem to lie ahead for Indian sugar mills. The outlook seems to be quite challenging in view of expectation of higher sugarcane and sugar production in the coming season or thereafter, adversely impacting the domestic sugar prices.

Margins: With domestic sugar prices expected to fall for the next season on YoY basis, cost of production is to be higher. In the last season due to sugar deficit, the companies had paid prices above the State Advised Price (SAP) to procure sufficient sugarcane supplies. Average cost of sugarcane was in the range of Rs. 115 to Rs 130 per quintal. With UP state elections in near future, the SAP is likely to go up by Rs 10 per cane, a consequence of some serious placatory measures. However, we do not expect sugar companies to pay any thing more than SAP declared by the UP Government due to sufficient sugarcane available across UP in this season. Also due to capacity expansions planned by the companies, the depreciation and interest costs are expected to rise going forward.

In the end...
The Indian sugar industry has been on an upward trend since 2003, leading to capacity expansion by the companies. However, with sugar inventories to grow and expectations of an increase in sugar cane prices, there might be some pressure on margins The industry may witness acquisitions and consolidation. Small firms, who will find it difficult to grow their bottomline, will be potential targets for larger players. Also the companies, which diversify their operations through integration, will be in a better position to manage the pressures. Though the news of removal of export ban and use of ethanol-blended petrol are positive, the benefits are difficult to quantify due to the regulatory and political risks. If these developments occur, this would help extend the cycle. Hence, the company with integrated operations, scale of operations, higher operating cash flows, better relations with the farmers and overall financial flexibility will stand to gain.


  

More Views on News

BANNARI AMMAN Announces Quarterly Results (3QFY20); Net Profit Up 78.6% (Quarterly Result Update)

Feb 14, 2020 | Updated on Feb 14, 2020

For the quarter ended December 2019, BANNARI AMMAN has posted a net profit of Rs 361 m (up 78.6% YoY). Sales on the other hand came in at Rs 4 bn (up 19.2% YoY). Read on for a complete analysis of BANNARI AMMAN's quarterly results.

BALRAMPUR CHINI Announces Quarterly Results (3QFY20); Net Profit Down 41.8% (Quarterly Result Update)

Feb 12, 2020 | Updated on Feb 12, 2020

For the quarter ended December 2019, BALRAMPUR CHINI has posted a net profit of Rs 700 m (down 41.8% YoY). Sales on the other hand came in at Rs 12 bn (up 27.1% YoY). Read on for a complete analysis of BALRAMPUR CHINI's quarterly results.

DALMIA BHARAT SUG. 2018-19 Annual Report Analysis (Annual Result Update)

Sep 23, 2019 | Updated on Sep 23, 2019

Here's an analysis of the annual report of DALMIA BHARAT SUG. for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of DALMIA BHARAT SUG.. Also includes updates on the valuation of DALMIA BHARAT SUG..

BANNARI AMMAN 2017-18 Annual Report Analysis (Annual Result Update)

Mar 14, 2019 | Updated on Mar 14, 2019

Here's an analysis of the annual report of BANNARI AMMAN for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of BANNARI AMMAN. Also includes updates on the valuation of BANNARI AMMAN.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS