Sugar stocks likely to underperform

The incentives that the government may announce for the ailing sugar industry will improve the bottom lines for sugar producers, but their shares will continue to underperform the market in the short run, according to analysts.

The 30-share BSE Sensex declined by 122 points or nearly one per cent on Friday. But the sugar counter perked up on big buying as investors expect substantial annual savings due to excise concessions under the proposed package, said dealers.

The proposed bailout package includes an excise tax relief for three years, a debt restructuring package for the private sugar mills and possible amendment to the Cental Sales Tax Act 1956 to include ethanol blending in goods of special importance.

"The government's measures would provide relief and improve bottom lines. But the focus should be on demand and supply of sugar. The supply is far in excess of demand at present," said Utpal Choudhury, an analyst with IDBI Capital Markets.

The sops will not lead to a spurt in sugar prices, predict analysts. "While Bajaj Hindusthan could save Rs 90-100 crore in excise annually, Balrampur Chini's savings could be about Rs 7-8 lakh. The proposed sops will allow sugar mills to improve their cash flow and pay farmers for sugarcane, but will do nothing for their profitability," said Vikram Suryavanshi, sugar analyst, Karvy Stock Broking.

Reports that India was likely to export 5,00,000 tonnes of raw sugar in October, the first time in the year, to reduce costs amid record domestic production and global price slump, also boosted the market sentiment on Friday, said dealers.

Companies could save as much as Rs 1,000 a tonne in processing costs by not refining raw sugar and can sell more to Bangladesh, Saudi Arabia, Indonesia and Egypt, which are building refineries, say reports.

Investors can take long positions in sugar as the sector will look up in 3 years if there is no drought, said Choudhury. The industry is facing a crisis following a glut in production, both domestically and globally.

The country is estimated to produce more than 27 million tonnes in 2007, about 40 per cent higher than last year's 19.2 million tonnes, while the demand has been stagnant at 19-19.5 million tonnes.

Bajaj Hindustan, India's largest sugar producer, gained as much as 3.14 per cent to Rs 167.50, while Balrampur Chini, the second largest producer closed at Rs 74.70, up 2.89 per cent on the Bombay Stock Exchange (BSE). Shree Renuka Sugars and Dwarikesh Sugar Industries surged by more than 2 per cent from their previous close, in a weak market.