Price buoy for sugar scrips seen continuing

Investors in sugar shares have had a sweet time over the last one year, given the two-to-three-fold rise in the value of their investments.

Meanwhile, it is not yet time to book profits. Analysts are optimistic that sugar shares may continue to outperform the broad market over the next two months riding on the buoyancy in sugar prices.

Over the last one year, share prices of Balrampur Chini Mills, Dhampur Sugar and Bannari Amman Sugars have almost doubled, while the Bajaj Hindustan stock has risen more than four times.

Sugar production in the country is expected to decline by over 20 per cent in 2004-05 because of lower cane acreage, drought conditions in a few sugarcane-growing areas in south India and crop failure in Maharashtra.

Retail sugar prices, which were around Rs 13 per kilogram at the beginning of 2004, have now risen to Rs 16-17. The prices are expected to rise further as the festive season approaches, and the inventory levels decline.

"Sugar is a relative inelastic commodity, so there is no significant drop in consumption if there is a significant increase in prices," said Sunil Shah, associate vice-president, Indsec Securities. "Hence, the sugar mills will benefit from hardening of sugar prices," he added said.

In the absence of a large inventory, the government's ability to control prices is likely to be limited, analysts said.

At current international prices, analysts rule out sugar imports to contain domestic prices, since at 60 per cent customs duty, imported sugar would be costlier than domestic prices.

"Sugar is not a freely tradable commodity (in the international market), and most of the global sugar trade is tied up in bilateral treaties," said an analyst with Motilal Oswal Securities.

"There is a big question mark over meeting India's sugar requirement at the price and quantity we require," he said. Motilal Oswal Securities is bullish on the sugar sector.

The government has already ruled out sugar imports in 2004-05.

Analysts and dealers said that sugar prices being a politically sensitive issue, the prices will not be allowed to rise indefinitely. If the prices cross the level of Rs 20-22 a kilogram, the government will definitely intervene, they said.

While shares of companies in most other sectors have still not fully recovered from their May 2004 meltdown, sugar shares are currently ruling near their 52-week highs.

Besides hardening of sugar prices, analysts see alternate revenue models such as bagasse and ethanol (for blending with diesel) to contribute to the companies' top line and bottomline.

According to a research paper on the sector released by Arihant Capital Markets Ltd, integrated sugar complexes can earn 10-20 per cent of their revenues from the production of value-added products such as power (from bagasse), alcohol (from molasses), bio-compost (from waste products) etc. The by-products are also used by the paper industry.

Analysts expect the current sugar shortage to continue till October 2005, when the next crop, due for sowing in October, is harvested.

In spite of the sugar shares having appreciated considerably over the last couple of months, dealers still see chances of a further rise.

"We are bullish on companies such as EID Parry India, Dhampur Sugar Mills, Bajaj Hindustan and Balrampur Chini Mills," said Ketan Dedhia, dealer, Nalanda Securities Pvt Ltd.

Dedhia feels that EID Parry could appreciate by about 10 per cent over the next few weeks, since the stock has not benefited from the rally in sugar stocks.

There are also expectations of a reforms package from the government for the sugar sector. "Once the fine print on the reforms package is clear, we will see a spate of announcements by sugar companies, which will act as the next trigger for the sector," Dedhia said.

Dedhia said that depending upon the reforms package's contents, companies may set up new crushing units, go for expansion, set up distilleries or produce higher quantity of ethanol.