 "sugar mills")
The last 10 months have seen a superb rally in sugar stocks as sugar realisations improved. The retail sugar prices have gone up almost 40% in last six months from Rs 26-27 a kg to Rs 36 a kg now. For manufacturers, rating agency ICRA data suggests that the prices that had seen three years low of about Rs 23,000 a tonne in July have improved to Rs 31,600 a tonne by end of March 2016. This is positive for the profitability of the companies and their balance sheet.
However, with the surging sugar prices, the government's concerns were bound to increase. This has pushed the government to think of some measures to control prices and thereby the rally in stocks too has taken some pause.
Most of the stocks as Balrampur Chini, EID Parry, Dhampur Sugar, etc, which had surged and hit their 52-week highs in March-April 2016, however are now trading at slightly lower levels. Nevertheless, analysts feel that though there may be a pause, there is steam left for the players. The sugar prices may not rise at the same pace as seen in past but will still remain firm.
The rise in sugar prices has taken place as estimates for sugar production in current sugar year (October-September) continuously got tweaked. The oversupply situation eased leading to a rise in sugar realisations.
As per latest ICRA estimates, domestic sugar production will be at around 25.5 million tonnes (MT) during the sugar year 2016 (SY2016; sugar year is October to September), a decline of 10% over the previous year, mainly driven by a drought Maharashtra, among the largest sugar producing states. Lower sugar production along with exports of around two MT, is likely to bring down the closing stocks to around 7.6 MT in SY2016 from around 9.5 MT in SY2015.
Thus, with the supply under check, prices are likely to remain firm and even gain a bit moving forward. The price rise however may not be very steep from here on. The government’s likely intervention is one reason whereas the millers may also be keen to liquidate stocks to clear their cane arrears and reducing working capital loans by end of the year. Overall, with prices likely to remain firm the financial performance of companies will continue improving quarter after quarter.
For instance, Balrampur Chini is likely to see a 233 basis points improvement in operating margins on sequential basis for quarter ending March’16 as per IIFL. Also, for FY16 the company’s earnings per share are anticipated at Rs 3.5 against loss of Rs 2.4 in FY15 and FY17 is likely to see a three-fold jump in EPS to Rs 10.3. Return ratios are also to improve.
EID Parry is also likely to see its fully diluted EPS improve 976% from Rs 1.4 in FY16 to Rs 15.5 in FY17 as per ICICI securities estimates. The return on equity will jump from 1.9% (FY16) to 19.6% in FY17. All this bodes well for stock prices too. ICICI Securities has a target price of Rs 250 for the stock trading at Rs 229 levels.
