Analysts see a probable down cycle for the commodity.
The sharp downswing in international and domestic sugar prices in the last couple of weeks has soured the performance of sugar stocks, and it may get worse as analysts call a probable down cycle for the commodity.
With sugar production expected to rise globally and domestically, the price of refined sugar has dipped 20 per cent to around $590 per tonne in the international market after touching a 25-year high of $740 per tonne this year, propelled by a 10-million tonne (MT) demand-supply deficit. Additionally, analysts say that announcements of India and other importers like Egypt deferring purchases, even as an improving 2010-11 supply outlook will narrow the deficit considerably (subject to normal weather patterns), have also impacted prices.
Domestic sugar prices are down over 20 per cent from peak levels in January 2010, partly because of an upward revision in production estimates for the current sugar season ending September 2010 and also because of tight inventory restrictions imposed by the government on buyers and changes in release norms (from monthly to weekly) for free sale sugar.
Indian production for the 2009-10 season is expected to be around 16.8 MT according to Indian Sugar Mills Association, against its earlier estimates of 15 MT; however, analysts expect it to be around 15.5 MT. By March-end though, more accurate production numbers will be available to gauge the net additional sugar imports by India (estimates peg it at about 2 MT), which will have to be concluded in the next one or two months. For 2010-11, production is expected to jump 40 per cent in India, according to a Morgan Stanley report, to 23.5 MT matching consumption levels.
Meanwhile, Brazil has had a good cane crop as well. There may be 10 per cent year-on-year increase in sugar production (about 4 MT) in 2009-10 (ending May) according to a Rabo Bank report. This has set the stage for a softening in prices.
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However, a CLSA analyst notes in a recent report that their discussions with industry participants suggest ethanol exports from Brazil could also rise significantly if crude oil prices were to stay above $85 a barrel. It further says strong crude oil prices and the recent fall in sugar price have improved the relative attractiveness of ethanol, and this may limit the increase in Brazilian sugar production.
Meanwhile, sugar stocks have fallen by about 15 per cent on average in the last month and are expected to fall further, given the near-universal downgrades. Individual stock performance would vary due to the diversified revenue streams (sugar, power generation) and the margin impact of raw sugar imported at higher prices earlier in the year.
However, higher cane costs paid to farmers when sugar prices earlier this year were sky-high would pinch margins of all companies, going ahead.
Bajaj Hindusthan and Shree Renuka would face closer investor scrutiny as debt levels go up, even as cash flows slow because of lower prices.
Balrampur Chini may bottom out sooner given its healthier cash flow outlook, led by an expected increase in co-generation revenues, which will also allow it to reduce leverage levels.
Triveni Engineering, however, has held up, well powered by its successful engineering business.