With the global shortage in sugar production, prices are likely to remain firm over the next few months. Provided India can manage to surpass earlier estimates and export additional stock, the sugar industry has the potential to become a ‘shining star’ from a ‘falling meteorite’, says a brokerage
With overall global shortfall and de-control measures announced by the Indian government, domestic sugar prices are expected to remain above Rs30 per kg. Recent floods in western Uttar Pradesh (UP), the second largest sugar producing state, have also affected overall production and it is now expected to be lower than earlier estimates of 25 million tonnes (MT).
India is the world's second largest producer and the world's largest consumer of sugar.
"With the destruction of the cane crop in UP and, hence, lowering of sugar production estimates for the country, coupled with the export obligation of around 1MT till March 2011, we believe domestic prices would remain firm and could rule above Rs30 per kg in the medium-term," said ICICI Securities Ltd in a report.
On Thursday, buoyed by expectations of a bumper output in 2010-11 and a 40% decline in retail prices since January, commodity market regulator Forward Markets Commission (FMC) lifted the ban on trading in sugar futures, reports PTI.
The government had banned futures trading in sugar in May 2009 to control prices in the domestic market. Since February 2009, India has been importing sugar to meet domestic demand.
According to the PTI report, sugar output in 2010-11 (between October-September, the crushing season) is expected to rise to 25MT from 19MT in the current sugar year. India's annual sugar demand is about 23MT.
"We believe that the two-year (FY2010 and FY2011) scenario for sugar companies in India is strong with the domestic and global sugar industries experiencing a deficit. Thus, sugar prices are likely to remain high leading to hefty profits for these companies. The key risk to sugar prices though is the continuous intervention by the government," said Sharekhan Ltd in a research report.
The global scenario of sugar production is also not very encouraging. Brazil, the world's largest producer and exporter of sugar, is facing adverse weather conditions that could affect sugar production in that country. There is a 38% increase in China's sugar imports as floods have destroyed the sugarcane crop there. Moreover, the crop deficit in Europe and Pakistan is also increasing import demand from these countries. All these factors will lead to firm prices until February 2011 as no other country, except India, would be able to supply sugar. Exports from India, on the other hand, are also restricted to 1MT.
ICICI Securities said, "With global sugar prices at seven-month highs discounting the deficit across the globe, domestic sugar prices at eight-month lows discounting the expected excess production and the Indian sugar sector finally waiting to witness the long awaited decontrol, the outlook for the sugar industry has transformed from a 'falling meteorite' to 'shining star'."
Reflecting the upbeat sentiments, during 1st April to 30th September, the Moneylife Sugar Index rose 24% to 2,790.72 points from 2,254.17 points while the Bombay Stock Exchange (BSE) Sensex increased 13% to 20069.12 points in the same period.
During the first half of FY11, Rajshree Sugars & Chemicals Ltd shares jumped 57% to Rs79.2, highest among the ML Sugar Index stocks. Dwarikesh Sugar Industries Ltd and Shree Renuka Sugars Ltd rose 38% to Rs104.1 and 29% to Rs87.95, respectively. Shares of Bajaj Hindusthan Sugar & Industries Ltd, EID-Parry (India) Ltd, Uttam Sugar Mills Ltd, Dhampur Sugar Mills Ltd and Sakthi Sugars Ltd also rose between 27% to 12%, during the first half.
Surprisingly, Bajaj Hindusthan Ltd, the country's largest sugar and ethanol producer, has remained flat over the past six months. "We remain negative on Bajaj Hindusthan due to the large debt on its books and stretched capex plans in the power segment. We believe these capex plans would result in a further increase in the company's debt or an equity dilution in the future, which remains an overhang on the stock," ICICI Securities said.
Bajaj Hindusthan has lagged competition in terms of diversifying and enhancing its revenue and profitability profile compared to peers. "The company bought the largest raw sugar inventory of 700,000 tonnes in the industry, contracted at $467 per tonne, which translated into total cost of Rs28 per kg for refined sugar. Due to the decline in sugar realisations, we expect the company's EBITDA margin in refined sugar to be affected severely," said another brokerage in a research note.
Similarly, during 1st April to 30th September, shares of Balrampur Chini Mills Ltd (BRCM) failed to impress. During the first half, its shares rose 5% to Rs92.7.
Jubilant Organosys Ltd, a pharmaceutical and life sciences company, said it changed its name as Jubilant Life Sciences Ltd with effect from 1st October.
On Friday, Jubilant Organosys shares declined 1.7% to Rs333 on the Bombay Stock Exchange, while the benchmark Sensex gained 1.9% to 20,445 points.
Maruti Suzuki India (MSI) reported its highest-ever monthly sales of 108,006 units in September, translating into a 29.7% increase vis-a-vis the year-ago period.
Sales in the same month last year stood at 83,306 units, MSI said in a statement.
"This is the highest ever total monthly sales by the company. The previous highest was 104,791 units in August 2010," it added.
This was the fourth time this fiscal that the company's monthly sales figure crossed the one lakh mark. MSI also posted its best-ever sales of 95,148 units in the domestic market during the month, a 32.9% increase from 71,594 units in September, 2009.
MSI's exports increased by 9.8% in September 2010, to 12,858 units from 11,712 units in the year-ago period, the company added.
On Friday, Maruti Suzuki shares ended 2.9% up at Rs1,482 on the Bombay Stock Exchange, while the benchmark Sensex gained 1.9% to 20,445 points.