Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Sugar: Bitter times! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 21, 2006

    Sugar: Bitter times!

    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.



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


    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms