 "Sugar: Tide turning in favour")
The sugar sector, which has remained beaten down for a long time now, is seeing the tide moving in its favour. With two consecutive years of weak monsoon, not only has it impacted sugar production in India but global output, too. Thus, sugar prices in the country have gained momentum and are much higher (Rs 5-6 a kg) than what they were last year. International prices, too, have inched up but shed some gains recently.
With improved realisations, sugar companies have reported better profitability in the December 2015 quarter and consequently, share prices of most sugar companies are significantly up from their lows. For instance, Balrampur Chini is the biggest gainer trading at Rs 81; up significantly from Rs 33 levels seen in June 2015.
Similarly, Triveni Engineering has seen its stock price almost triple to Rs 39 levels. Others such as EID Parry, Bajaj Hindusthan and Shree Renuka, too, are trading 33-54 per cent higher. Although all these stocks had seen sharper gains, the recent correction in broader indices has led to some decline in these stocks as well. With firm sugar prices, the outlook remains healthy.
December quarter sees visible improvement
For the quarter ended December 2015, companies mentioned above reported a profit at profit before interest, depreciation and tax level versus loss in the year-ago quarter. EID, however, had been in profits during the year- ago quarter, too. However, Bajaj Hindusthan or Shree Renuka felt the burden of higher debt, and interest costs eating into their profits. The higher debt is the one reason why these stocks have not seen a surge in stock prices similar to Balrampur Chini.
Lower output, both globally and in India
Analysts remain upbeat on the sector as they expect further revival in profitability moving forward helped by better realisations. International sugar production is likely to decline by three million tonnes (mt). India, which had seen surplus inventory of about 10 mt at the start of sugar year (SY) 2016 (October to September), after mandatory exports of 4 mt, is expected to see the surplus inventory decline, thereby supporting prices. So far, exports have been a little over a million tonnes.
Cane prices, a worry
While better realisations bode well for the profitability of domestic sugar companies, issues such as higher sugarcane prices still remain a concern. The Uttar Pradesh government has maintained state advised price (SAP) for cane at Rs 280 a quintal. However, it has not announced incentive or subsidy for millers like it did last year. Nevertheless, currently, companies as Balrampur Chini during the December 2015 quarter reported a profit at the earnings before interest and tax level even without accounting for any cane subsidy versus a loss in the year-ago period.
There are a host of companies that are reeling under high debt, which is another concern area. Analysts recommend that investors wait for a reduction in debt of companies such as Bajaj Hindusthan and Shree Renuka before taking an investment call.
They, however, remain positive on select sugar companies. Those at India Infoline recommend a target price of Rs 110 for Balrampur Chini as they expect 2016-17 to turn into a deficit year assuming 2 mt production decline year-on-year, assigning a ‘buy’ based on replacement cost basis. According to them, UP elections remain the biggest risk to 2017 SAP.
Analysts at Edelweiss, too, expect Balrampur Chini to benefit more than peers owing to low debt, lower sugarcane arrears to farmers, and being an integrated player having strong management track record. EID Parry and Triveni are also on their ‘buy’ list.
