The sugar industry is likely to post robust profit in the financial year ending September 2010 on the back of an expected decline in production in the current sugar cycle (October 2009-September 2010).
According to sugar sector analysts from Antique Broking, Credit Suisse, DSP Merrill Lynch, HSBC Global Research, Morgan Stanley Research and Prabhudas Lilladher, the five most tracked sugar companies are expected to post revenue growth of over 70 per cent and a whopping 280 per cent rise in net profit in financial year 2010.
Bajaj Hindusthan is likely to turn around in 2010, with a net profit of Rs 490 crore compared to an expected net loss of Rs 20 crore in the financial year ended September 2009. Balrampur Chini, Dhampur Sugar and Shree Renuka are expected to post a net profit jump of over 200 per cent each on the back of a robust 50-100 per cent rise in net sales. Triveni Engineering is expected to post a 70 per cent rise in net profit and a 25 per cent growth in net sales.
The poor rainfall levels in sugarcane growing areas are expected to limit the sugar production to 15 million tonnes (mt) in financial year 2010. The decline will lead to a rise in sugar prices and, in turn, net profits for sugar companies expects the analyst at Morgan Stanley. Sugar prices in Delhi and Mumbai are Rs 35-37 a kg and are expected to move up further, due to rise in cost of the raw material after the new cane pricing mechanism comes into effect. The protest against the import of raw sugar by UP farmers is also likely to affect the supply and so, will also drive up sugar prices.
The analyst expects a sugar shortage in India of at least seven-eight mt in FY10, and even if consumption falls by five per cent in the current year, India could run out of sugar by August 2010. To ensure food security, India would need to import an incremental six mt in the current year. According to the analyst at HSBC Global Research, sugar prices will remain high until 2011, as India’s sugar inventory is at a 10-year low (1.7 months of consumption) after a sharp fall in production in the last crushing season (CS) 2008-09.
The production is unlikely to recover in 2009-10, as the government estimates cane production will fall by nine per cent due to low acreage, and this is likely to lead to an historical high of seve million tonnes of imports. In 2008-09 (year ending September), sugar production declined to 14.7 mt due to lower recoveries and high cane diversion to gur and khandsari units. Production is expected to increase to 15-16 mt in 2009-10, but the consumption is expected to be 22-23 mt. Hence, the demand-supply gap is expected to continue for a second year.
Going forward, sugar companies are likely to carry negligible debt during the next down cycle and have no capital expenditure plans and are, thus, less risky compared with the previous down cycle, said the analyst. The companies are taking new initiatives to diversify revenue and feedstock, which will help to arrest the earnings decline to modest levels compared to a previous down cycle. India is expected to import an additional 8.4 mt over the coming 18 months, and given an annual global export of 30 mt, this is likely to lead to a further strengthening of international prices, even from the current 28-year high.
Renuka Sugar, the largest one, has raised its expectation for FY10 sugar volumes by 15 per cent to 1.7-2 mt, primarily due to an inventory of 390 million kg. This means the company expects to sell 1.8 mt in FY10. Analysts expect Renuka Sugar, on the back of a higher sugar and alcohol volume, to maintain the earnings estimate for FY10 despite a 20 per cent rise in cane cost and lower FY09 margins.
| SWEET BUSINESS | ||||||
| Rs crore | Net sales for CS** ended | Net profit for CS ended | ||||
| FY09 | FY10E | FY11E | FY09 | FY10E | FY11E | |
| Bajaj Hindusthan | 2,329* | 4675.70 | 3714.3 | -19.10* | 489.13 | 293.33 |
| Balrampur Chini | 1,729.09* | 2168.35 | 2228.55 | 95.38* | 360.75 | 349.50 |
| Dhampur Sugar | 935.55 | 1503.50 | 1128.00 | 56.19 | 173.90 | 97.00 |
| Renuka Sugar | 2816.5 | 6151.83 | 6778.80 | 224.30 | 694.6 | 495.78 |
| Triveni Engg | 1894.81 | 2409.56 | 2406.80 | 169.80 | 288.17 | 246.40 |
| E:Estimated sales and net profit based on analyst reports from Antique Broking, Credit Suisse, DSP Merrill Lynch, HSBC Global Research, Morgan Stanley Research and Prabhudas Lilladher * Estimated sales and profit based on analyst reports; ** Crushing season | ||||||
Balrampur Chini Mills will benefit from a change in power policy of the Uttar Pradesh government. The management has indicated that it will increase volumes and unit prices for the power business. According to the analyst at HSBC Global Research, assuming that the company increases the days of operation for its power division from 110 to 220 in FY10, earnings should increase by 18 per cent. By his estimate, the company’s net profit should rise 278 per cent in FY10.
Bajaj Hindusthan is likely to show robust net profit growth in FY10, driven by a 63 per cent rise in sugar sales, 130 per cent rise in sugar mill throughput and a 39 per cent rise in sugar price, says an analyst at DSP Merrill Lynch. The key risk is four per cent excessive loss on conversion of raw sugar. Increased conversion loss is a key risk, as the company will be processing imported raw sugar for the first time and there is a precedence of over 18 per cent conversion loss by first-timers.
