 "Sugar stocks: Sweeter medium-term prospects")
For the bleeding sugar sector, the recommendations of a financial package and doubling of ethanol blending in petrol to 10 per cent provided some respite. However, the real gains would accrue once the committee to link the prices of sugarcane with those of sugar brings out its recommendations and these are implemented.
Analysts say the benefits for sugar producers would accrue only after a year. Given the financial performance, business model and debt levels of sugar companies, they prefer Balrampur Chini and Shree Renuka Sugars, from a medium-term perspective.
In Uttar Pradesh, unpaid cane price arrears from sugar year 2012-13 (October-September) stood at Rs 2,400 crore. With the state government maintaining cane prices at Rs 280 a quintal for sugar year 2013-14, the arrears were estimated to exceed Rs 12,000-13,000 crore in March-April 2014, according to Indian Sugar Mills Association (Isma).
The Centre’s decision to provide Rs 7,200-crore loans to the sugar sector for paying cane arrears with 12 per cent interest subsidy (seven per cent to be paid from the sugar development fund and five per cent by the government) bodes well. This has led to cane crushing by sugar mills in Uttar Pradesh, which was delayed by about a month. The industry would also be provided a moratorium of two years on repayment of loans. The government is also considering restructuring existing loans, which should provide further relief to the sector, which has debt of about Rs 20,000 crore.
While these are positives, the real issues on profitability are yet to be addressed. Consider this: The sector was demanding a cane procurement price of Rs 225 a quintal, which they believed was viable, given the prevailing sugar prices. However, sugar manufacturers in Uttar Pradesh would still have to pay a cane procurement price of Rs 270 (after a Rs 11 discount, as declared by the state government).
Considering the recovery rate of about nine per cent, the raw material cost to produce a kg of sugar is Rs 30. Add to that a conversion cost of about 34 paise a kg and the cost of production rises to Rs 30.34 a kg (the same as the selling price of Rs 30-31 a kg). Given other costs such as interest and depreciation, the profitability of sugar companies would remain under pressure.
With blending of ethanol with petrol doubled from five per cent to 10 per cent, benefits should be accrued, provided the move is properly implemented. Ethanol blending of 10 per cent will require more molasses, which would otherwise have been used to make sugar. As a result, sugar production will fall, leading to higher prices. Achal Lohade at JM Financial estimates this could lead to a fall of one-two million tonnes (mt) in annual production and, in due course, wipe out India’s sugar surplus. Abinash Verma, director-general of Isma, said 10 per cent blending might reduce 1.7-1.8 mt of surplus production.
However, considering historical events/trends, Lohade said it was unlikely this would be implemented fully in the near term. There is uncertainty over the timing, as well as quantum, considering the last tender finalisation by oil marketing companies was recorded seven months ago and the second tender is still awaited. Also, operational issues (taxation, logistics, etc) apart, protests by chemicals/alternate customer industries are likely, as lower ethanol availability and higher prices would raise raw material costs.
Outlook for top sugar producers
Looking at all these factors, sugar stocks, which saw strong momentum on Friday, lost some steam thereafter. Among these, Balrampur Chini holds the most promise. With distillery capacities, it is the least leveraged compared to its larger peers. Shree Renuka, too, holds promise, as it does not face hurdles in Karnataka (where pricing is already linked to sugar prices). In Maharashtra, while the committee on sugarcane pricing mechanism has been formed, benefits would accrue next year.
Rohit Agarwal at SPA Securities said the international sugar surplus of 10.1 mt was likely to fall to 3.5 mt, which would benefit Shree Renuka in its Brazilian operations, which account for a large chunk of its revenues. The fall in the surplus should also boost domestic and international prices, benefiting the industry. Renuka, which has port-based refining capacities in India, continues its sugar refining and export business around the year, unlike its peers that see seasonal operations. Thus, at current valuations, Agarwal says Shree Renuka and Balrampur Chini are good medium- to long-term bets. Given the consensus target prices of Rs 26 and Rs 51, respectively, investors should consider these on declines.
Analysts aren’t positive on Bajaj, owing to its high debt.
Analysts say the benefits for sugar producers would accrue only after a year. Given the financial performance, business model and debt levels of sugar companies, they prefer Balrampur Chini and Shree Renuka Sugars, from a medium-term perspective.
In Uttar Pradesh, unpaid cane price arrears from sugar year 2012-13 (October-September) stood at Rs 2,400 crore. With the state government maintaining cane prices at Rs 280 a quintal for sugar year 2013-14, the arrears were estimated to exceed Rs 12,000-13,000 crore in March-April 2014, according to Indian Sugar Mills Association (Isma).
The Centre’s decision to provide Rs 7,200-crore loans to the sugar sector for paying cane arrears with 12 per cent interest subsidy (seven per cent to be paid from the sugar development fund and five per cent by the government) bodes well. This has led to cane crushing by sugar mills in Uttar Pradesh, which was delayed by about a month. The industry would also be provided a moratorium of two years on repayment of loans. The government is also considering restructuring existing loans, which should provide further relief to the sector, which has debt of about Rs 20,000 crore.
While these are positives, the real issues on profitability are yet to be addressed. Consider this: The sector was demanding a cane procurement price of Rs 225 a quintal, which they believed was viable, given the prevailing sugar prices. However, sugar manufacturers in Uttar Pradesh would still have to pay a cane procurement price of Rs 270 (after a Rs 11 discount, as declared by the state government).
Considering the recovery rate of about nine per cent, the raw material cost to produce a kg of sugar is Rs 30. Add to that a conversion cost of about 34 paise a kg and the cost of production rises to Rs 30.34 a kg (the same as the selling price of Rs 30-31 a kg). Given other costs such as interest and depreciation, the profitability of sugar companies would remain under pressure.
With blending of ethanol with petrol doubled from five per cent to 10 per cent, benefits should be accrued, provided the move is properly implemented. Ethanol blending of 10 per cent will require more molasses, which would otherwise have been used to make sugar. As a result, sugar production will fall, leading to higher prices. Achal Lohade at JM Financial estimates this could lead to a fall of one-two million tonnes (mt) in annual production and, in due course, wipe out India’s sugar surplus. Abinash Verma, director-general of Isma, said 10 per cent blending might reduce 1.7-1.8 mt of surplus production.
However, considering historical events/trends, Lohade said it was unlikely this would be implemented fully in the near term. There is uncertainty over the timing, as well as quantum, considering the last tender finalisation by oil marketing companies was recorded seven months ago and the second tender is still awaited. Also, operational issues (taxation, logistics, etc) apart, protests by chemicals/alternate customer industries are likely, as lower ethanol availability and higher prices would raise raw material costs.
Outlook for top sugar producers
Looking at all these factors, sugar stocks, which saw strong momentum on Friday, lost some steam thereafter. Among these, Balrampur Chini holds the most promise. With distillery capacities, it is the least leveraged compared to its larger peers. Shree Renuka, too, holds promise, as it does not face hurdles in Karnataka (where pricing is already linked to sugar prices). In Maharashtra, while the committee on sugarcane pricing mechanism has been formed, benefits would accrue next year.
Rohit Agarwal at SPA Securities said the international sugar surplus of 10.1 mt was likely to fall to 3.5 mt, which would benefit Shree Renuka in its Brazilian operations, which account for a large chunk of its revenues. The fall in the surplus should also boost domestic and international prices, benefiting the industry. Renuka, which has port-based refining capacities in India, continues its sugar refining and export business around the year, unlike its peers that see seasonal operations. Thus, at current valuations, Agarwal says Shree Renuka and Balrampur Chini are good medium- to long-term bets. Given the consensus target prices of Rs 26 and Rs 51, respectively, investors should consider these on declines.
Analysts aren’t positive on Bajaj, owing to its high debt.