In Focus: Sugar Cos’ Sweetness Dilutes | Value Research Bumper output of commodity and UP assembly polls will put pressure on profits
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In Focus: Sugar Cos’ Sweetness Dilutes

Bumper output of commodity and UP assembly polls will put pressure on profits

Sugar companies have been on a roll since 2003, their stocks having appreciated over 20 times till April 2006. But since then, there has been a correction in the prices of sugar stocks. Global sugar production was on a decline in the past three years and as a result, the prices spiralled. The companies' announcement of capacity additions also fuelled the bull run.

But the outlook is not sweet anymore. Sugar production in India is going to be bumper this year. India is likely to see a production of 23 million tonnes, while consumption is going to be 19.6 million tonnes. Thus, even after the re-export obligations, there will be a surplus situation. The government has banned the export of sugar and the sugar industry expects this ban to be lifted by October, which would take care of some of the surplus. So, analysts are expecting realisations to be lower than the earlier estimates of around Rs 19-20 per kg to around Rs 17-18 per kg.

Assembly elections in Uttar Pradesh will mean high sugarcane prices this year, despite the bumper production. Last year too, higher cane prices had pushed up raw material costs for sugar companies, but that was because of cane shortage in some parts of the country. The government is expected to introduce 5 per cent blending of ethanol in petrol, which is not only environment friendly but will also reduce the import bill.

In the international market, there are expectations that Brazil will be exporting more sugar this year, so global sugar prices too might be checked, though Indian sugar mills are expecting prices to be higher by 15-20 per cent. Thus, prices as well as the government ban on exports do not bring confidence. Plus, the government pricing of ethanol is also uncertain as yet. One of the largest players, Balrampur Chini, has said margins are likely to reduce by Re 1 per kg.

So, the short-term does appear slightly difficult for sugar companies, even though volume growth is going to be good this year. However, over the long-term, despite the industry being politically sensitive, the India will remain a formidable sugar manufacturer globally along with Brazil. Back home, sugar mills are looking at increasing capacities for both sugar and ethanol. They are also cutting down on power costs by setting up captive power plants. No wonder then that valuations of sugar companies have come down dramatically in the past four months.

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