With production surging, fortunes of the sugar industry have changed dramatically. Sugar companies, which were expected to make bumper profits because of soaring sugar prices — Rs 41.15 per kg in January 2010 — are in news for different reasons. Ever since scaling a peak in January, prices have corrected by almost 33.5 per cent to Rs 28 per kg. This is also one of the reasons why most sugar companies have seen a sharp decline in their share prices.
Downturn in sugar cycle
Sugar prices have corrected globally and in the domestic market. This is consequent to expectations of the global sugar industry moving from a deficit to a surplus situation. According to the International Sugar Organisation (ISO), the world sugar market, which was estimated to see a deficit of about 8.51 million tonnes for sugar season (October to September) 2009-10, could see surplus stocks of 2.5 million tonnes in the forthcoming season in 2010-11.
“There are indications that in 2010-11, the deficit phase is coming to an end. In some key producing countries, sugar output is likely to expand. The first obvious candidate is India. The notorious production cycle has entered the upswing phase, and next season’s output is likely to grow further. The government expects next season’s output to improve massively to 22-23 million tonnes white sugar, as against 18.5-19.0 million tonnes in 2009-10,” says Sergey Gudoshnikov, senior economist at ISO.
| KEEPING A WATCH | |||
| P/BV(x) | FY11E PE (x) | ||
| 5-yr band | Current | ||
| Renuka Sugar | 1-4 | 1.50 | 11.90 |
| Bajaj Hind | 0.5 - 5.8 | 0.90 | 15.70 |
| Balram Chini | 0.5 - 7.5 | 1.50 | 15.40 |
| Dhampur Sug | NA | 0.60 | 3.70 |
| Triveni Engg | NA | 1.80 | 11.40 |
| Source: Analysts estimates | |||
| SUPPLIES TO RISE | ||||
| (million tonnes) | SS08 | SS09 | SS10E | SS11E |
| Production | 26.30 | 14.70 | 18.70 | 24.70 |
| Opening stock | 9.20 | 8.10 | 3.30 | 4.60 |
| Imports | NA | |||
In fact, as against the government’s projections, many industry analysts estimate that white sugar production will be as high as 26 million tonnes. Sergey says, “If production gains allow India to harvest a crop approximately corresponding to the mid-level of the suggested range, that is, to about 24 million tonnes (white sugar), it will bring roughly an additional six million tonnes, raw value, to global supply.” Apart from India, surplus production is also expected in other key producing nations like Brazil, China and Mexico.
Impact
In the current season, due to less availability of cane, sugar producers paid farmers about Rs 250 per quintal — higher than the fair and remunerative price (FRP) of Rs 129.8 per quintal and the state-administered price (SAP) of Rs 165 per quintal. Despite this, profits were way above the normal, as net realisations were as high as Rs 8-12 per kg. Now, profits will take a hit due to lower prices and impact of high-cost inventories. According to analysts, companies are holding inventories at about Rs 25-27 per kg. Hence, stabilisation of sugar prices at current levels is crucial. Otherwise, the companies will suffer losses, which will lead to higher arrears, impacting the farmers.
The road ahead
This is also one of the reasons that sugar companies are asking the government to levy duty on cheap imported sugar. For instance, even a 20 per cent import duty on sugar will give a landed cost of approximately Rs 29 per kg, which is close to the domestic price and will therefore help stabilise it.
Also Read
Following industry expectations that the government may impose import duty on sugar, share prices of sugar companies have recovered some lost ground over the last fortnight.
Meanwhile, analysts believe that after the significant correction seen recently, sugar prices should stabilise at current levels. Nevertheless, for the second half of 2009-10, most sugar companies will report lower profits or even losses. The profitability of the companies is expected to improve only in the second half of 2010-11, when prices are expected to be stable and cane prices low. Among stocks that analysts prefer are Shree Renuka Sugars (due to better profitability, diversified business and pending re-negotiation of its Brazilian acquisition) and Balrampur Chini Mills (due to relatively lower debt and increasing revenue contribution from power and ethanol).