Monday, December 27, 2010

Sugar Sector - Buy on declines

Permission to export sugar will lead to higher realisations and margins, signalling a potential upgrade in earnings.

The share prices of the country's sugar producers, Bajaj Hindusthan, Balrampur Chini and Shree Renuka Sugars, jumped 2-5 per cent on Thursday after the government's move the previous day allowing producers to export half a million tonnes of sugar. The development is positive for sugar companies, considering they can now take advantage of the relatively high international sugar prices

Stocks of sugar companies had outperformed the broader markets from May till October, but took some beating in November as sugar prices (both global and domestic) corrected. Besides, the markets sentiments, too, turned weak. However, sugar prices have been ruling firm since then. And the latest move by the Indian government should provide support to domestic sugar prices, which could narrow the gap with global prices.

Analysts believe the Maharashtra and south India-based sugar mills like EID Parry, Bannari Amman Sugars, Sakthi Sugars and Shree Renuka Sugar (which is also the largest sugar exporter) will benefit from this development, given their operations are near major ports. The UP-based sugar mills will benefit only if the differential between the domestic and international prices remains high.

Nevertheless, analysts believe given that part of the surplus sugar will now move to the international markets, there will be less pressure on the domestic prices which have so far lagged behind global prices. This will prove beneficial for all the companies, which could otherwise have reported losses.

Good timing
According to estimates, the country will have a sugar surplus of about six million tonnes in the sugar season 2010 (the season ends in the month of September) and about seven million tonnes (including the inventory carryover from the current season) in the next year. On the back of this, sugar prices in the domestic market are depressed relative to the international prices. Sugar is trading in the domestic markets at about Rs 29 a kg. This is lower by 15-20 per cent compared with the prices prevailing in the international markets. The international white sugar prices are currently hovering around $767 a tonne or Rs 34.52 a kg based on a dollar-rupee rate of Rs 45.

Margin booster
While it is certain that only a part of the sugar produced will be exported, companies stand to gain from higher realisations. First, the international prices are reasonably high (and likely to remain firm) and secondly, the domestic prices too could inch higher and narrow the gap. Thus, companies could see a healthy improvement in their blended realisations.

Analysts believe most of the companies are sitting on inventories valued at Rs 25-28 a kg. Besides, as the cane prices are lower by about 20-25 per cent this year, the cost of production will also be lower. In addition to the export incentives, the companies are also being given an additional Rs 90 a quintal (90 paise a kg) increase in the price of levy sugar.

Since the companies are required to sell about 10 per cent of their sugar production to the government at a fixed price (which is usually lower than the market price), an increase in levy sugar price (though marginal) should further boost the overall realisations.

Most of the analysts have factored in a sugar realisation of Rs 25-27 a kg for the next two years. However, with these developments, there are chances the companies could report better realisations and, therefore, higher margins leading to further earnings upgrades. Among the sugar producers, analysts have a ‘buy' rating on companies like Shree Renuka Sugars, Balrampur Chini Mills and EID Parry.

Bought to you by


Ingenious Investor

Equity Research Division


Ravina Consulting

Pattamal Plaza

3rd Cross Kamanahalli

BANGALORE 560084


For Free Stock Advise + Ideas

sowmya@ravinaconsulting.com

Talk / SMS 08105737966


Read - www.ingeniousinvestor.blogspot.com

Follow us - www.twitter.com/smartinvestor