Sugar surges on better realisations

The stocks have gained 44.60 per cent on an average since July 1.

The sugar sector has been unfolding a sweet success story for some time now. Over the past 12 months, sugar stocks have hit the roof, and since July 1, they have gained an average 44.60 per cent.

Behind the buoyancy in the sugar stocks is the increase in realisations of sugar mills; realisations currently hover between Rs 18-20 per kg, substantially up from Rs 12-14 two years ago. The Centre's decision to make it mandatory for oil companies to buy ethanol from sugar mills has also helped the sector's cause.

Purchase of ethanol by oil companies will enable sugar mills to produce ethanol from molasses throughout the year "" reducing the burden of storing the by-product. This will also ensure a constant flow of revenue stream. Besides, the price of ethanol sourced by oil companies is fixed at Rs 18.75 per litre. 
 

A SWEET DEAL
	Jul 1, 2005	Aug 30, 2005	% chg	PE
Bajaj Hind	148.75	200.25	34.62	18.46
Balrampur Chini	64.90	89.80	38.37	14.87
Bannari Amman Sugars	608.20	782.70	28.69	15.47
Dhampur Sugar	132.30	175.90	32.96	17.48
Mawana Sugars	80.15	112.60	40.49	10.59
KCP Sugar Ind	199.35	353.10	77.13	6.87
Sakthi Sugars	81.65	95.85	17.39	153.41
Dwarikesh Sugar	152.60	225.90	48.03	-
Oudh Sugar Mills	85.55	118.50	38.52	19.29
Upper Ganges Sugar	205.95	300.20	45.76	14.96
Rajshree Sugar	54.25	79.95	47.37	11.10
Thiru Arooran Sugars	108.00	160.10	48.24	13.14
Rana Sugars	25.10	32.50	29.48	7.44
Ugar Sugar	16.39	23.35	42.46	6.53

The Indian Sugar Mills Association (ISMA) is lobbying for a rise in the ethanol prices on the plea that the price was fixed when the international crude prices were ruling at US $45 per barrel only, compared to the current level of over $60 per barrel. The organisation is pressing for linking the prices of ethanol to global crude prices in some way.

Priyanko Panja, assistant vice-president, Edelweiss Capital, said, "Ethanol production may not be so attractive at this price, as ethanol production would call for a minimum investment of Rs 15 crore by any firm. However, there will be a lot of demand for the product with blended motor spirit mandated for distribution in nine states. This calls for ethanol production capacity of 330 million litres per annum."

"The rising demand for potable spirit (liquor-grade alcohol) will benefit companies like Ballarpur Chini, which are into spirit production already. This segment still has good margins," Priyanko added.

All the good news notwithstanding, the sugar stocks have received a mixed reaction from the market players.

Major sugar stocks have witnessed a price rise in the range of 4.73 per cent to 164 per cent during the last couple of months. The sector may present a better showing in the days come, but concerns arise from the unusual price-earnings (P/E) multiples that some of these companies have touched.

Having a commodity-based business model, these companies may not be able to sustain these double-digit P/E ratios, analysts noted. Some stocks with lower P/E multiples include Dwarikesh Sugars, Mawana Sugars and Rana Sugars.

Alok Agarwal, senior analyst at Motilal Oswal Securities, said, "A P/E of about 10 is at the desirable level. Once beyond that level, one has to apply caution in picking a stock. Besides, one should have a long-term - say, a two-year - perspective and not a short-term view."

"I see better prospects for the stocks of Ballarpur Chini, Bajaj Hindusthan, Dhampur Sugar and diversified sugar major EID Parry. No price pressures are expected in the next couple of years because of good demand."

A senior analyst of a private broking firm also concurred with the view that lower-P/E stocks would be a better pick and opined that the positives that are set to accrue in the next 18 months have been discounted in the present prices of the stocks.

Even in case of reversal of the trend, top three companies "" Bajaj Hindustan, Ballarpur Chini, Bannari Amman - would survive. But lower-P/E stocks like Mawana Sugars and Dhampur Sugars still promise appreciation, Agarwal added.

Panja said there was no threat to domestic demand even if there were a bumper crop in the current season beginning October 2005. As sugar manufacturers shift to production of ethanol on a large scale in South America, the supply side could get affected adversely. In the domestic market too, supply is not expected to overshoot demand for the next two years.