 "Sugar decontrol: Impact on companies, consumer and shareholders")
After the partial deregulation of the oil and gas space, the Cabinet Committee on Economic Affairs (CCEA) has now partially decontrolled the Rs 80,000 crore sugar industry.
Earlier in October 2012, a committee headed by Dr C Rangarajan, who also is the chairman of Prime Minister's Economic Advisory Council (PMEAC) had recommended lifting controls in this sector.
The markets have given a thumbs-up to the development with most sugar stocks rallying up to 20% in intra-day deals. Among individual stocks, Bajaj Hindustan, Shree Renuka Sugars, Balarampur Chini Mills, Mawana Sugars, Oudh Sugars and Dhampur Sugar Mills have rallied between 10 – 20% on the Bombay Stock Exchange (BSE).
As per the recent decision, States will now purchase sugar from open market via a bidding process and sell it at lower rates through ration shops. The difference between the two prices will be borne by the Centre, but with a cap of two years.
However, the government will continue to fix fair and remunerative price of sugarcane. The minimum distance criteria between two mills will also continue. According to government estimates, the current market price of sugar is Rs 32 per kilogram (kg), while the price under the public distribution system (PDS) is Rs 13.50 per kg.
Impact
So, how does the move impact the millers? Will you now end up paying more for the sweetener? Does the move unlock value for shareholders and should you buy these stocks now?
Impact on companies:
“With the CCEA nod for sugar decontrol, we expect sugar mills to breathe a bit easy as sugar companies no longer have to bear the levy sugar obligation for two years. Also the release mechanism has been abolished and with the front end cleared, the back end needs to be looked into as per the recommendations of the Rangarajan committee report. We believe that this partial decontrol is positive for millers,” says a note from LKP Research.
While on one hand the companies will be able to save Rs 3,000 annually from the move, the government’s annual subsidy burden for sugar will increase to Rs 5,300 crore from about Rs 2,600 crore currently, reports suggest.
“The development is positive for companies, which are already facing a lot of problems. If there is no levy sugar for the next two years, the move will bring back stability in these companies. Cane production, too, has been very volatile. So once sugar companies start making money, they will be able to pay the farmers, who can then possibly look at increasing production, said A K Prabhakar, senior vice-president (equity research) at Anand Rathi.
“A number of companies are making losses in this sector. Given the policy move, I expect the profitability of companies to improve substantially. In case of a zero–debt or a low–debt company, I expect the profits to triple in FY14,” he added.
Impact on consumers:
So, will you end up paying more for sugar now?
“There is a possibility that the sugar prices may remain volatile in the immediate near-term and move up going ahead. However, they will eventually be at par with the global prices. If Indian prices remain high, one can import the commodity. Thus, the domestic prices will be the same as the international prices over the next couple of quarters,” notes C P Krishnan, Wholetime Director, Geojit Comtrade.
“Companies, too, can plan and keep buffer in place to keep the prices under check, especially during the festival season. I expect the sugar prices to move up around 25% from the current levels over the next couple of quarters,” he added.
Stock Strategy
Despite the run up seen on Friday, most analysts are bullish on this space and expect the stocks to do well going ahead.
Prabhakar of Anand Rathi expects Balrampur Chini, Bajaj Hindusthan, EID Parry, Dharani Sugars and Chemicals, Andhra Sugar and Renuka Sugars to gain substantially from the policy decision. “One can buy these stocks at the current levels for an upside of 30 – 40% in the next 12 – 18 months,” he says.
LKP Research recommends buying Balrampur Chini Mills for a price target of Rs 65; Triveni Engineering for a price target of Rs 23; KCP Sugar with a price target of Rs 30; Dharani Sugars for a price target of Rs 45 and Dhampur Sugars for a price target of Rs 70.
Earlier in October 2012, a committee headed by Dr C Rangarajan, who also is the chairman of Prime Minister's Economic Advisory Council (PMEAC) had recommended lifting controls in this sector.
The markets have given a thumbs-up to the development with most sugar stocks rallying up to 20% in intra-day deals. Among individual stocks, Bajaj Hindustan, Shree Renuka Sugars, Balarampur Chini Mills, Mawana Sugars, Oudh Sugars and Dhampur Sugar Mills have rallied between 10 – 20% on the Bombay Stock Exchange (BSE).
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New Rules of the Game
As per the recent decision, States will now purchase sugar from open market via a bidding process and sell it at lower rates through ration shops. The difference between the two prices will be borne by the Centre, but with a cap of two years.
However, the government will continue to fix fair and remunerative price of sugarcane. The minimum distance criteria between two mills will also continue. According to government estimates, the current market price of sugar is Rs 32 per kilogram (kg), while the price under the public distribution system (PDS) is Rs 13.50 per kg.
Impact
So, how does the move impact the millers? Will you now end up paying more for the sweetener? Does the move unlock value for shareholders and should you buy these stocks now?
Impact on companies:
“With the CCEA nod for sugar decontrol, we expect sugar mills to breathe a bit easy as sugar companies no longer have to bear the levy sugar obligation for two years. Also the release mechanism has been abolished and with the front end cleared, the back end needs to be looked into as per the recommendations of the Rangarajan committee report. We believe that this partial decontrol is positive for millers,” says a note from LKP Research.
While on one hand the companies will be able to save Rs 3,000 annually from the move, the government’s annual subsidy burden for sugar will increase to Rs 5,300 crore from about Rs 2,600 crore currently, reports suggest.
“The development is positive for companies, which are already facing a lot of problems. If there is no levy sugar for the next two years, the move will bring back stability in these companies. Cane production, too, has been very volatile. So once sugar companies start making money, they will be able to pay the farmers, who can then possibly look at increasing production, said A K Prabhakar, senior vice-president (equity research) at Anand Rathi.
“A number of companies are making losses in this sector. Given the policy move, I expect the profitability of companies to improve substantially. In case of a zero–debt or a low–debt company, I expect the profits to triple in FY14,” he added.
Impact on consumers:
So, will you end up paying more for sugar now?
“There is a possibility that the sugar prices may remain volatile in the immediate near-term and move up going ahead. However, they will eventually be at par with the global prices. If Indian prices remain high, one can import the commodity. Thus, the domestic prices will be the same as the international prices over the next couple of quarters,” notes C P Krishnan, Wholetime Director, Geojit Comtrade.
“Companies, too, can plan and keep buffer in place to keep the prices under check, especially during the festival season. I expect the sugar prices to move up around 25% from the current levels over the next couple of quarters,” he added.
Stock Strategy
Despite the run up seen on Friday, most analysts are bullish on this space and expect the stocks to do well going ahead.
Prabhakar of Anand Rathi expects Balrampur Chini, Bajaj Hindusthan, EID Parry, Dharani Sugars and Chemicals, Andhra Sugar and Renuka Sugars to gain substantially from the policy decision. “One can buy these stocks at the current levels for an upside of 30 – 40% in the next 12 – 18 months,” he says.
LKP Research recommends buying Balrampur Chini Mills for a price target of Rs 65; Triveni Engineering for a price target of Rs 23; KCP Sugar with a price target of Rs 30; Dharani Sugars for a price target of Rs 45 and Dhampur Sugars for a price target of Rs 70.