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.

CompanyPrice onPrice on%
Dec 20, 2006 (Rs)Jun 14, 2006 (Rs)Change
BSE-Sensex13,332 8,929 49.3%
Bajaj Hindusthan227 254 -10.6%
Balrampur Chini 85 97 -12.4%
EID Parry132 173 -23.7%
Oudh Sugar 91 104 -12.5%
Dwarikesh Sugar 90 98 -8.2%
Rajshree Sugars 83 92 -9.8%
Renuka Sugars452 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/tonne2003200420052006E2007E2008E
Opening stock11.311.68.54.73.36
Production20.11412.719.12323.9
Imports - 0.42 - - -
Total supply31.42623.223.826.329.9
Consumption18.317.318.51919.520.6
Exports1.50.2 - 1.50.8 -
closing stock11.68.54.73.369.3
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.

Equitymaster requests your view! Post a comment on "Sugar: Bitter times!". Click here!

  

More Views on News

SHREE RENUKA SUGARS 2020-21 Annual Report Analysis (Annual Result Update)

Nov 3, 2021 | Updated on Nov 3, 2021

Here's an analysis of the annual report of SHREE RENUKA SUGARS for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SHREE RENUKA SUGARS. Also includes updates on the valuation of SHREE RENUKA SUGARS.

TRIVENI ENGG 2020-21 Annual Report Analysis (Annual Result Update)

Nov 3, 2021 | Updated on Nov 3, 2021

Here's an analysis of the annual report of TRIVENI ENGG for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TRIVENI ENGG. Also includes updates on the valuation of TRIVENI ENGG.

E.I.D. PARRY Announces Quarterly Results (1QFY22); Net Profit Up 117.1% (Quarterly Result Update)

Aug 16, 2021 | Updated on Aug 16, 2021

For the quarter ended June 2021, E.I.D. PARRY has posted a net profit of Rs 3 bn (up 117.1% YoY). Sales on the other hand came in at Rs 44 bn (up 5.1% YoY). Read on for a complete analysis of E.I.D. PARRY's quarterly results.

Why Did Sugar Stocks Surge Today? (Views On News)

Jun 3, 2021

A look into the factors contributing to the rally in sugar stocks.

BALRAMPUR CHINI Announces Quarterly Results (1QFY22); Net Profit Down 46.0% (Quarterly Result Update)

Aug 11, 2021 | Updated on Aug 11, 2021

For the quarter ended June 2021, BALRAMPUR CHINI has posted a net profit of Rs 719 m (down 46.0% YoY). Sales on the other hand came in at Rs 11 bn (down 20.3% YoY). Read on for a complete analysis of BALRAMPUR CHINI's quarterly results.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS