Sugar producers expect better results ahead

Export okay, higher stock limits enourage bullish cues; industry urges more on these lines.

With government policies gradually turning favorable, sugar producers are expecting a turnaround in their fortunes in the next quarter. Official permission to export 500,000 tonnes of sugar and increase in stock limits are boosters announced by the government last week.

Taking a bullish cue from these, sugar prices have started firming up, while sugar companies’ share prices have also risen in recent days (see graphics). Sugar ex-factory prices have started improving and are now quoting above cost for most mills. Covering of sugar for exports and the demand for higher stock could lead to some more increase in sugar prices in the weeks to come.
 

SWEET RETURNS

Prices

• Ex-factory sugar prices up Rs 100 a quintal to Rs 2850 (M) a quintal in the last three days
• Spot price also up by Rs 100 a quintal to Rs 2,841-2,926 a quintal (M-30) in three days, similarly, small sugar (S-30) quality shot up to Rs 2,801-2,841 a quintal. International prices have also improved after a fall making sugar exports profitable and projected to remain high over concerns that cool, wet weather may be causing some production problems for Brazil's sugarcane crop, according to traders.

Government's initiatives

• The government allows 500,000 tonnes of exports
• Stock limits were also raised to 500 tonnes from the existing 200 tonnes permission to carryforward unsold free sale quota to next month

Industry demands

• The industry has demanded to allow 1 million tonnes of further exports

Industry scenario and outlook

• Average cost of production at Rs 28 a kg, average cost of selling between Rs 28-30 a kg for Indian producers. This means, producers will break even or make marginal profit. Next quarter looks lucrative due to favourable government decisions. if price stays above Rs 30, companies will do better

Narendra Murkumbi, president, Indian Sugar Mills Association, termed the government’s steps the beginning of a turnaround.

While 500,00 tonnes of export has been allowed, the sugar federation in Maharashtra has demanded to be allowed to export another million tonnes. This is, they say, the exportable surplus, with 25 mt of output this year and 23.5 mt estimated consumption. With an estimated 4.8 mt of carryover stocks, the government may create buffer stocks for market intervention, when required.

“One positive indication is that the government has understood the situation the industry was passing through. The government has also realised that the industry is facing a real problem in selling the allotted monthly quota and, therefore, the producers are getting extension for selling in the subsequent month. This has avoided distress sale at the mandatory levy price,” said Sanjay Tapriya, Director - Finance of Simbhaoli Sugars Ltd.

The quarter ending March 31 is likely to remain subdued for a majority of producers because of the lower sale price, compared to the average cost of production. Most sugar companies are expected to end this quarter with a break-even or some profit on gross business from selling sugar. But, “given the fact that the government has started thinking in the right direction, the next quarter will be profitable, provided the steps continue to remain favourable for industries,” said Sageraj Baria, an equity analyst with Mumbai-based Angel Broking.

If further exports are allowed or any buffer norm for sugar is set, the industry will benefit at large. Baria sees sugar prices also improving for the export market and the domestic market in the weeks to come.

The increase in stock limit means large consumers such as cold drinks’ and sweets’ manufacturers would be able to procure a larger quantity of sugar at a competitive price. This will also increase pipeline inventory. The onset of summer is expected to increase the demand for sugar from ice cream and soft drink makers.