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| The right sweetener |
| Ram Prasad Sahu / Mumbai Jul 14, 2010, 00:08 IST |
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While the proposal to decontrol the sugar sector is a long-term positive, upsides in the near term are capped for companies.
The news that the government may consider lifting controls on the sugar sector — coupled with the recent rise in sugar prices, albeit marginally – saw major sugar stocks run up by about 13 per cent from their May lows. Analysts say some of the increase in the stock prices is also a result of an overreaction on the downside during the earlier fall.
While most analysts believe any move to decontrol will be positive, a clear benefit to manufacturers (a saving of Rs 10 a kg) will accrue if the government were to foot the bill on the subsidy on levy sugar, which is supplied to the public distribution system (PDS). However, given the uncertainty, HSBC analysts believe that 2010-11 earnings will be skewed to the downside due to lower sugar prices, high-cost inventory, higher cane cost and lower sale price of alcohol.
We highlight the changes that could be made:
What could change...
Among the major changes that could come through if the decontrol plan sees the light of the day include the elimination of release quotas. These quotas force companies to supply a certain quantity of produce every month to the PDS. A decontrol would help them plan distribution better, improving their realisations.
Further, analysts believe the levy sugar, which is currently procured at half of the market price by the government from private producers, should be fully subsidised by the government.
Finally, the sector has asked for linking cane procurement to market prices of sugar. In addition to these major steps, analysts believe the elimination of sugar stockholding norms for industrial users will also help.
Future outlook
India’s sugar production is expected to be 24.5 million metric tonnes for the 2010-2011 sugar season (ending September) with prices expected to be around the Rs 24-a-kg mark. Analysts say prices are unlikely to go below this, since the cost of production is pegged at Rs 22 a kg. At present, domestic sugar mills are holding inventory with a cost of production at Rs 25-27, according to Edelweiss Securities. Since a drop below this level will mean losses to millers and, thus, arrears for farmers, the research firm believes that prices – as of now – are unlikely to fall below these levels.
| IMPROVING SHOW? |
|
In Rs crore
|
Bajaj Hindusthan |
Balrampur Chini |
Shree Renuka |
| FY |
2010 |
2011E |
2010 |
2011E |
2010 |
2011E |
| Net sales |
4,803 |
3,571 |
2,161 |
2,300 |
6,523 |
5,534 |
| Ebitda |
675 |
630 |
400 |
445 |
1,107 |
882 |
| Net profit |
145 |
145 |
189 |
245 |
677 |
424 |
| P/E (x) |
14.7 |
20.1 |
12.0 |
9.3 |
5.9 |
9.6 |
| E: Estimated Source: Bloomberg |
Rising stocks and the expected jump in production for the coming season is a far cry from the situation in 2008-09 when supply fell 44 per cent to 14.7 million tonnes. The fact that production will rise by a quarter in the current season (ending September 2010) to 18.5 million tonnes could make it easier for the government to usher in decontrol, say analysts.
We now review the prospects of the country’s leading sugar producers including their performance for the June quarter:
Bajaj Hindustan: India’s largest producer of sugar is expected to report a loss of about Rs 120 crore for the quarter ended June on sales of about Rs 1,540 crore. The company is the most affected among sugar companies due to the drop in prices during the quarter from its peaks and the fact that it is estimated to have a high raw sugar inventory at about Rs 28 per kg. Analysts believe that the biggest issue for the company is its debt position (gross debt of over Rs 3,000 crore). Given the price correction in sugar and its debt-equity position (1.3 times), the company may delay the roughly Rs 1,800-crore investment to set up a 450-Mw thermal plant. The stock has jumped over 10 per cent in the last one month and currently trades at an expensive 20 times its 2010-11 earnings estimates.
Balrampur Chini: The company is expected to post revenues of Rs 3,500 crore with earnings before interest, taxes, depreciation and amortisation (Ebitda) at about Rs 32 crore — down 35 per cent and 75 per cent, respectively, for the June quarter. The company is estimated to post a loss of about Rs 40 lakh. HSBC estimates that there will be a write-back of Rs 42 crore (provisioned earlier) related to levy sugar, the prices of which have been revised. Enam Research, in its May report, had been bullish on the scrip due to certainty of cash flows, lower leverage and attractive valuations. The stock has run up over 12 per cent since and trades at 9.3 times its 2010-11 earnings estimates. Consider at dips.
Shree Renuka Sugars: The company is expected to post a 17 per cent increase in net profit to Rs 90 crore on revenues of Rs 1,360 crore for the June quarter. Manufactured sugar volumes are estimated to have gone up 26 per cent year-on-year for the quarter. The company’s recent acquisition of the Brazilian sugar company, Equipav, at five per cent lower than earlier valuation on an enterprise value basis is not considered significant. The management expects the Brazilian entity, in which it will invest about Rs 900 crore (expansion and debt repayment), to turn earnings-accretive from 2011-12. At current prices, the stock is trading at 9.6 times its 2010-11 estimates and leaves little room for upsides.
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