Stocks of these companies outperform even the sharply rising wider index
The share prices of sugar companies, which had fallen sharply from January into May, have seen a smart recovery since end-August. Since September, while the Sensex is up 12 per cent, sugar stocks have posted a robust rise of 8-30 per cent. The improvement in sentiment is despite the estimates of India’s sugar production rising over 30 per cent in SY11 (ending September 2011) to surpass its consumption and the benign sugar prices. Analysts believe the domestic sugar cycle has bottomed out and most of the negative news has already been factored in the share prices. They expect sugar prices to improve in the near future, narrowing the gap between domestic and global prices. Analysts also expect the surplus production to be partly absorbed by exports (1 million tonne allowed so far), lower sugarcane prices and steps to decontrol the industry.
Demand-supply, pricing outlook
Global sugar prices have rallied to 26 cents per pound (lb) driven by lower-than-expected production in Brazil (the world’s largest sugar producer), a 38 per cent increase in China’s sugar imports (post the damage to its crop) and the crop deficit in Europe and Pakistan. This has led to global surplus estimates being revised to 2.1 MT from 5.2 MT estimated earlier for 2011.
India, on the contrary, is expecting a surplus cane production in SY11. As per ISMA, the sugar output is estimated at 25.5 MT, with carryover stocks of 5.8 MT, leaving around 3 MT of surplus sugar this year. This expected surplus has resulted in a decline in sugar prices from Rs 42 per kg early this year to Rs 27 per kg currently.
The good news is that domestic prices are expected to firm up (moving closer to global prices) to over Rs 30 per kg in the medium term, led by the 1 MT export obligation and recent floods in western UP. Additionally, with sugarcane availability set to rise, experts believe its prices will dip around 25 per cent to Rs 200 per quintal, which should help the margins of sugar producers.
Further boost to earnings
Companies need to sell just 10 per cent of their sugar output to the government at below-market prices. The government has recently hiked these prices from about Rs 13 to Rs 17.57 a kg. It has also raised ethanol purchase prices (which oil marketing companies pay to sugar players) from Rs 21.5 per litre to Rs 27 per litre. All these should aid sugar companies’ revenues and profitability. Lastly, while the proposal to decontrol the sector is lying with the government, any move in this direction should prove positive for the companies and most likely result in a re-rating of sugar stocks.
Shree Renuka Sugar
With two sugar mills (VDI and Equipav) in Brazil, which enables it to arbitrage between global and domestic prices, Shree Renuka Sugar is poised to gain the most from the surging international sugar prices. The Brazilian safari would enable it to sustain volume growth while the rise in global prices would aid margin expansion. Higher sugar prices would result in more than 50 per cent Ebitda margins from Brazilian subsidiaries in the September quarter. At Rs 84.7, the stock is trading at a PE of 15.13 times its SY11 estimated earnings (Rs 9.5-Rs 9.8) and is the top pick of most analysts.
Balrampur Chini
Balrampur Chini will benefit from the expected decontrol measures by the government. The rise in sugar prices would drive margin expansion in the coming quarters. Its mills are located in eastern UP; safeguarding it from the floods in western UP. Analysts estimate the company to post an EPS of Rs 7.6-8.6 for 2010-11. The company has a low-cost inventory and a strong balance sheet. It has the highest co-generation capacity among sugar mills and will benefit the most from the rise in power realisation by UPSEB to Rs 4 per unit. At Rs 93.4, it commands a PE of 12.29 times its estimated SY11 earnings. Most analysts have a buy on the stock.
Bajaj Hindusthan
Bajaj Hindusthan, which has nine factories in western UP, could see a reduction in availability of sugarcane due to the floods in that region in September. The company’s major concern is the huge debt on its books, amounting to Rs 3,600 crore. It plans to set up a 2,430 MW capacity power plant entailing an investment of Rs 10,000 crore. This could involve infusion of fresh funds, straining its financials. While an upward revision of ethanol prices will provide some relief, high inventory levels and delays in supplying 100 MT ethanol to OMCs in 2011 are among other concerns. At Rs 133.8, the stock trades at 15.93 times its estimated FY11 earnings. Most analysts have a sell on the stock.
