Sugar industry on a sweet run

A fall in sugarcane crop and the bottoming out of sugar prices both at the domestic and international markets have put the industry back in the limelight.

As a result, frontline sugar sector shares such as Bannari Amman, Balrampur Chini and Bajaj Hindustan have witnessed a sharp rise since the beginning of 2004.

According to industry estimates, sugarcane production this year is expected to decline by 15-20 per cent, which will result in a sharp downward correction in the inventory levels.

Also, due to rising global consumption, prices of sugar is on the ascend.

Jigar Shah, head of research at KR Choksey, said, "I expect the sugar stocks to do well considering the reduction in the inventory levels. Sugar prices, which were depressed in the last four years, dipping to Rs 1,099 per quintal in 2002-03, are expected to rise with increased consumption."

There has been a rally in sugar prices since June 2003, immediately after the amendment of the Essentials Commodities Act.

Though the prices fell in the September-December quarter, they recovered in the subsequent months to Rs 14 per kg from Rs 12 per kg.

Local wholesale sugar prices are currently ruling around Rs 16 per kg for better and medium varieties as against mid-January 2004 levels of Rs 14 per kg.

An analyst with a domestic brokerage house said in the next two years, the inventory will be wiped out as the annual production of sugar is 45 million tonne against a consumption of 50 million tonne. This, he said, will lead to a shortfall and price hike.

Also, only 20 per cent of the sugar producing capacity is in the organised sector. Their cost of production is 25 per cent lower than the industry average.

Thus the organised sector companies are going to benefit in the long run.

And with the industry anticipating a price hike post-elections, margins are expected to be good in the coming quarters.

Ambareesh Baliga, vice-president, private client group at Karvy Stock Broking, said, "Sugar prices have been stagnant for some time now and are expected to go up after elections, which will add to the company's bottom line. Also, revenues from sale of ethanol, a byproduct, are likely to significantly increase, benefiting mills. It will accelerate their evolution from single-product agro-based units to multi-product industrial organisations."

Closing stock in October 2004 is expected to be half of what was seen last year as a result of the sharp decline in production.

The recent rise in sugar prices is not only expected to be sustained but one can take a view of hardening future prices, said a sector analyst.

She added that the industry certainly needs a few more positive measures to make exports a financially viable. This is because world prices are low and production costs are high.

But exports could drop in the current year due to firm domestic prices and reduced production.