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
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.