A ray of hope for sugar stocks

Heavy volumes have pushed stocks higher despite UP mills suspending operations

Despite the sugar mills in Uttar Pradesh (UP) suspending operations following an impasse over announcement of sugarcane price by the state, most stocks gained between 4 – 17% in intra-day deals on heavy volumes on Wednesday. Reports suggest that the Central government is working out a formula to ease their concerns and financial burden.

 

UP sugar mills, which account for almost a third of the country’s total sugar production, have officially declared that the sugar industry in the state would not operate till the Rangarajan formula is adopted to fix the cane price, reports suggest.

 

Sugar industry in UP and Maharashtra — the two largest producing states — have not yet started crushing sugarcane in the new crop year, which started in October, citing mounting cane arrears and the inability to pay high price to farmers.

 

 

Last year, UP had fixed cane price at Rs 280 a quintal for the common variety. The mills still owe more than Rs 2,300 crore to cane farmers for the 2012-13 season. In the current sugar year (2013-14), the mills claim, the paying capacity has come down to Rs 225 a quintal and any price above that will lead to arrears and losses to the industry. The millers have been demanding the state fix “affordable” cane prices, in line with the recommendations of the Rangarajan Committee. They want the price at 70% of the revenue realised from sugar, bagasse, molasses and press mud, or at 75% of the revenue realised from sugar. 

 

Sugar prices (M-30 variety), which were around Rs 37 per kg in October 2012 are currently hovering around Rs 31 per kg (Rs 3,100 per quintal). With sugar recovery from cane at around 9-10%, the cost of sugarcane to produce a kg of sugar works out to about Rs 28-31. Add to that other productions costs like power, transportation, wages, etc, as well as finance costs, sugar companies would end up with losses. 

 

Reports peg India’s total sugar production in 2012 – 13 (sugar year October – September) at 25.14 million tonnes (MT), with UP contributing 30% in the annual production. Bajaj Hindusthan and Balrampur Chini, the biggest sugar players in UP, account for nearly half of the state’s sugar production.

 

Given that the sugar millers in the country could be sitting on nearly 2MT of sugar stock in their warehouses, analysts suggest that any shortfall in the sweetener is bound to see its prices escalate in the domestic market.

 

“Whenever there is this kind of a situation, the underlying sugar (commodity) stocks tend to rally, as it could translate into higher profit for these companies. Most companies have a good inventory in their warehouses that can fetch better realisation if the sugar prices escalate. In my opinion, sugar prices will increase from the current levels,” says Deven Choksey, MD & CEO, K R Choksey Shares and Securities.

 

Meanwhile, reports indicate that the government has convened a high-level meeting on Wednesday to work out a relief package for the industry in a move to end the impasse. The mills have demanded implementation of the Rangarajan Committee's recommendations, which include linking the cane price to sugar prices.

 

“I think the government will ultimately have to relent and adopt a better pricing mechanism for cane, which will be linked to the sugar prices. Thus, cane and sugar prices will be linked and this is a fundamentally positive move as the farmer’s and consumer’s interests will be taken care of,” Choksey adds.

 

With the general elections round-the-corner, analysts say that the government will try to resolve the situation at the earliest.

 

Points out A k Prabhakar, an independent market analyst: “I think the government cannot afford high sugar prices for too long given that the country is gearing up for general election. The government will have to come out with a compromising price formula so that the farmers and the millers concerns are assuaged.”

 

Some reports also suggest that the industry may be given interest-free or loans at highly subsidised rates by the government to over-come their financial woes, given that many companies are saddled with high debt. 

 

Stock strategy

While there could be some increase in sugar spot prices in short term following UP crisis and general delay in crushing across country, in medium term sugar prices will coninue to remain under pressure. Janhavi Prabhu, analyst with the India Ratings said, "Indian sugar industry is sitting on an inventory of 8 million tons and initial estimates for this crushing season for sugar production is 25  million tons. Considering demand for sugar at 23 million tons and taking best case scenario of 2 million tons of exports country would land with inventory of close to 8-9 million tons. Given the global surplus situation and higher inventory levels in India,  sugar prices would remain under pressure for some more time." 

 

Among individual stocks, Bajaj Hindustan, Balrampur Chini Mills, Shree Renuka Sugars, Sakthi Sugars, Oudh Sugar, Dwarikesh Sugar Industries, EID Parry, Dhampur Sugar Mills and Mawana Sugars have rallied between 4 – 17% on back of heavy volumes on the Bombay Stock Exchange (BSE).

 

Choksey is not positive on the UP-based sugar stocks at the current juncture. However, he prefers south-based sugar stocks, especially EID Parry.

 

“Millers that do not have a presence in UP like AP Sugar, EID Parry, Shree Renuka Sugars, Dharani Sugars, Bannari Amman Sugars will benefit more from this development. On the other hand, those who have adequate stocks in their warehouses, despite being in UP, will benefit from sugar scarcity in case the (commodity) prices firm up. Of the lot, I like EID Parry, AP Sugar and Shree Renuka Sugars. One can play these stocks from a short-term perspective as the upside may not last too long,” Prabhakar adds.