The Heartbeat of Capitalism
In mid-2008, when a whirlwind of credit crises hit the global economies, massive State intervention was needed to prop up the pillars of modern finance. Even as their institutions were kept afloat by taxpayers’ money, financial executives were found to have relentlessly lined their pockets. All this has thrown into doubt the efficiency of the capitalist system. Some commentators have been prepared to dump all the benefits of modern finance and take the extreme view that capitalism, as we know it, is and a completely new system is needed.

Robert J Barbera’s thesis is that capitalism has several flaws but is the best of all possible systems for creating wealth. However, the benefits of capitalism have a cost attached; this cost is a periodic boom and bust led by the financial sector. The same financial systems that create innovative instruments, help reduce risks and create wealth, lead us into financial collapse through excessive risk-taking.

When the collapse takes place, other institutions of society must step forward and deal with this characteristic of financial capitalism, especially when it threatens to spiral into ‘deflationary destruction’. In this, Mr Barbera is a camp-follower of the economist Hyman Minsky who interpreted the work of John Maynard Keynes in the area of financial boom and bust and prescribed what the government needs to do during a financial wreck. Keynes, it may be recalled, argued that the government must step in and intervene with demand-boosting measures when the normal forces of free-markets fail. But Keynes had not taken into account that “the transmission mechanism for monetary policy is through the financial markets” and that banking and financial markets, the cornerstone of modern capitalism, can undergo wild swings leading to booms and busts in the real economy. This is where Minsky’s contribution comes in.

Minsky proposed theories linking the inherent fragility of the financial market to business cycles and to speculative investment bubbles. Minsky argued that in prosperous times, when corporate cash flow is excessive, a speculative euphoria of borrowing and investing develops. After this, the business cycle turns, debts exceed what borrowers can pay from their incoming revenues which, in turn, leads to a financial crisis. Banks and lenders tighten credit, even to companies that can afford loans, leading to a credit crunch and economic contraction.

At that stage, it is critical for the government to step in and keep the financial system going. Mr Barbera states that “there is simply no place for free market ideologues in a banking crisis… The lesson is unambiguous. Banks are not like other businesses.” Mr Barbera recounts the history of the late 20th century, when he was the chief economist for several investment banks, a staff economist for a senator and an economist for the Congressional Budget Office. He gives us a ringside view of business cycles and also of the financial instability that Minsky described, caused by risk-taking of businessmen, bankers, investors and, of course, policymakers such as Alan Greenspan and Ben Bernanke – the creators of the stock bubble in the 1990s and the credit and housing bubble of the 2000s.

One of the popular reactions to a financial bust is to demand more regulation. But the author argues that “regulations are costly. They will only take us so far. And they will be effective for only a while.” The State must find a way to get people on to the path of innovation and creative destruction. For that, the banking system must be kept functioning. This is a small cost for the benefits that come over the long run from free markets and advanced financial systems in normal times. This book clarifies a lot of the currently debated issues by bringing in a fresh perspective. – Debashis Basu

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5 Cheap Sugar Stocks
One of the sectors that has performed exceptionally well through the bear market is the sugar sector (see chart), and is going to do even better. This is simply because sugar supply is going to fall far more short of demand than was forecast earlier. Kingsman, a consultancy firm for sugar and ethanol, has raised its estimate of global sugar deficit from 2.5 million tonnes to 4.5 million tonnes for the year ending March 2010. This can be attributed to the declining production in India and strong consumption in India and China. Indian farmers have diverted their land to more profitable crops in the last season when global surplus drove sugar prices down. They have also been put off by the scrap between sugar companies and UP (Uttar Pradesh) politicians who insisted on a unreasonably high minimum support price last season.

The global shortfall in sugar is so severe that even a better-than-expected production in Brazil has not helped to improve the situation. Brazil will produce 31.2 million tonnes of sugar in the current April-November harvest, up from 26.7 million tonnes a year earlier. However, most of its sugarcane is used for ethanol production. Approximately, 33% of the total crushing capacity in Brazil has no diversification facility – they cannot switch over to sugar production from ethanol.

Besides, Brazil cannot increase its sugar output as its sugar mills are operating at full capacity. Kingsman says that the price of sugar now depends on how much India will import in the coming weeks and months. India has contracted for about two million tonnes of raw sugar since February 2009. Raw sugar production in India is expected to fall to 14.8 million tonnes in the 2008-09 season from 26.5 million tonnes a year earlier. This is because of lower acreage for sugarcane, which has shrunk from 2.85 million hectares in 2007-08 to 2.14 million hectares in 2008-09, as per the Indian Sugar Mills Association.

To mitigate the shortage, the government has also allowed the mills to free import of raw sugar under the advance licence scheme and export it as refined sugar. The government has also allowed companies to import raw sugar under open general licence, which means that they don’t have any export obligation. However, State-owned firms, which were importing sugar from February following the zero-duty sugar import order, have stopped buying more sugar because of rising global prices. Will higher sugar prices encourage farmers to increase sugarcane production? More remunerative prices and shorter cycles in other crops and lower input cost may restrict farmers’ interest in sugarcane. Cane is harvested after 12-14 months from the time of plantation and farmers get paid 13-15 months after cultivation. So, farmers are likely to switch to shorter-duration crops. The rise in acreage will not be enough to increase the production, which has been estimated at 20 million metric tonnes by the Indian Sugar Mills Association for 2009-10, while the demand will be 21 million metric tonnes.

India will have to import sugar for 2009-10 also. It has started importing sugar this year, for the first time since the 2005-06 season. Currently, sugar is in the range of Rs26-Rs27/kg while it was available at Rs18-Rs23/kg in October 2008. Price is expected to go higher as the sugar shortage will continue into the next year. Given this bullish scenario, here are five of the cheapest sugar stocks. They are not the best companies. Among the finest sugar companies is Shree Renuka Sugars, but it is the most expensive stock.

Upper Ganges Sugar & Industries has three sugar mills, one distillery and two co-generation power plants. This company from the KK Birla group was the first to import 25,000 tonnes of raw sugar when the duty on it was abolished in February 2009. The raw sugar was contracted at $250-$255/tonne, which was way below what the other sugar companies had to pay for imports. Its recent performance is decent. Revenues have grown 21% over the past five quarters. Operating profit margin in the past two quarters has been excellent because of the rising sugar price. The five-quarter average OPM is 23%. The stock is really cheap. Its market-cap is just 0.15 times its sales and 0.65 times its operating profit, despite the fact that the stock has moved from Rs27 in early December 2008 to Rs81 now.

Oudh Sugar Mills is another KK Birla group company and has three sugar mills, one in Hargaon (UP) with a crushing capacity of 10,000 tonnes of sugarcane per day, one in West Champaran (Bihar) with a crushing capacity of 7,500 tonnes per day and other in Shahjahanpur (UP) with a crushing capacity of 4,200 tonnes per day. It has set up two distilleries, one in Hargaon with a capacity of 11.53 million litres per annum and another in West Champaran, with a capacity of 4,200 tonnes per day to utilise molasses. To meet the growing demand for ethanol, it has set up an ethanol producing plant in Hargaon. It also has three co-generation power plants. As sugar earns the maximum revenue for the company, sugar price rise is expected to boost its topline in the next few quarters. Sales in the March 2009 quarter, have fallen from those in the December quarter, but there was a slight increase in operating profit. The average sales growth over five quarters was 55%. It operates with a healthy 23% margin. The stock had hit Rs294 in late April 2006 and then fell all the way to Rs22 in late December 2008. It moved up to Rs65 at the time of writing. But its market-capitalisation is still 0.33 times its sales and 0.98 times its operating profit of March.

Kesar Enterprises has its sugar factory in Baheri, UP. Its agro-tech division claims to have standardised a cost-effective technique for fast multiplication of sugarcane tissue-culture plants which are sold to local farmers at subsidised rates. Its distillery division contributes a significant portion of its revenue. In the March quarter, its distillery segment was the largest revenue contributor. It has not been able to gain from the rising sugar price in the March 2009 quarter as its sales declined from the December quarter. The stock had touched Rs279 in late April 2006 and then fell all the way to Rs31 in late December 2008. It has moved up to Rs71 at the time of writing but is still cheap. The five-quarter sales growth is a healthy 44%. It operates with a relatively low margin of 14%. Its market-capitalisation is just 0.21 times its sales and 0.72 times its operating profit.

Dwarikesh Sugar has three sugar plants – all in UP. Two of them are located in Bijnor district and the other is located in Faridpur district. The capacity of the distillery unit is 30 kilolitres per day. It has 86MW of power generation capacity, of which 30MW is used for captive consumption and the rest is sold to the UP government grid. Its five-quarter average sales growth was 40%. The margin has surged in the past two quarters which is attributed to the rising prices. Its operating profit margin was 26%. The lower sugarcane acreage in UP is likely to continue in the coming harvest season which will keep sugar prices high. Dwarikesh is expected to gain from this. Its market-cap is 0.34 times its sales and barely one time its operating profit.

Bajaj Hindusthan Sugar & Industries is the changed name of Pratappur Sugar and Industries which was bought by Bajaj Hindusthan Ltd (BHL) in 2005. The plant had a capacity of 6,000 tonnes crushed daily (TCD). Three new plants have also been opened with a total capacity of 34,000 TCD. Its distillery can manufacture 160 kilolitres of industrial alcohol per day. The company’s operations are backed by 88MW of power. It operates at a healthy margin of 24%. In the March 2009 quarter, it made a forex loss of Rs21.36 crore which reduced its operating profit to Rs119.55 crore. The March quarter marked a turnaround; the company had lost money in the previous two quarters. Its market-cap is 0.87 times its sales and 0.69 times its operating profit. It is cheaper than BHL, although it is under the same management and is, in fact, a subsidiary of BHL.

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