Await correction to buy sugar stocks

Already sitting on low debt, Balrampur Chini plans to utilise surplus cash to reduce its debt further

The share price of most sugar companies have hit their 52-week high in the past few days, as the outlook on profitability growth got a further boost. While international sugar prices continue their northward trajectory, realisations within India are also improving, with the demand-supply equation turning favourable for companies.

After falling from its September 2012 high of Rs 39.25 a kg, domestic sugar (medium grade) prices have risen 61.5 per cent from a low of Rs 23.07 a kg in July 2015 to Rs 37.3 a kg currently, a big relief for sugar companies, most of which have been reeling under debt. Although all sugar manufacturers will benefit, companies with lower debt (and better ability to service it), as well as low cane arrears, are the ones investors can look at.

Among the top five by market capitalisation, Balrampur Chini and EID-Parry India, having lower debt and better scope for profitability improvement, are among analysts’ preferred picks. Though Bajaj Hindusthan and Shree Renuka Sugars are also benefiting from revival in the sugar cycle, higher debt means most of their operating profit is consumed by interest costs.

Among other stocks, analysts remain positive on UP-based players such as Dalmia Bharat, Dhampur Sugar Mills, Dwarikesh Sugar and Triveni Industries, situated in the largest cane producing belts. However, as most of these stocks have gained substantially, experts suggest investors accumulate these on dips.

In fact, given the sharp run-up, experts also believe some profit-booking is likely. Hence, they should await a correction to enter these counters. The key risk, especially for UP-based players, is the possibility of cane procurement prices being revised upward, with the approaching state elections.

Balrampur Chini Mills, which reported a profit in FY16 compared to a loss in FY15, is now anticipated to report a net profit of Rs 251 crore in FY17, by IIFL estimates. Already sitting on low debt compared to peers and with its major capex complete, the company plans to utilise surplus cash to reduce its debt further.

Analysts at Ventura Capital, who remain more bullish on others such as EID Parry, say if the difference between realisations and costs increases from Rs 1-3 a Kg to Rs 3-5 a kg, Balrampur Chini and Kothari Sugar, with a currently low ratio of operating earnings to cane crushed could be the dark horses. Balrampur’s cane arrears compared to annual cane (raw material) procured is only 21 per cent, among the lowest in larger peers.

EID-Parry is another company with a relatively low debt-equity ratio, of less than two times, interest coverage ratio at 1.4 and a cane arrears to cane procured proportion of 39 per cent. The interest coverage ratio indicates how easily a company can pay interest costs on debt dues and is arrived at by dividing earnings before interest and tax by interest costs. Thus, due to low debt, low arrears and higher interest cover, the company is likely to see good profitability growth among peers.

The stock, which hit a 52-week high of Rs 258.80 on Monday, trades at Rs 243.90.

Among south-based players, analysts are positive on KCP Sugar and Industries. G Chokkalingam, managing director, Equinomics Research, says as of end-March, KCP Sugar’s net debt is only 23 per cent of total capital employed. More, it closed the year with an inventory of Rs 276 crore, most of which is sugar, normally valued at cost of production. Compared to most sugar mills that finance three-fourth of inventories through borrowed capital, KCP Sugar finances this much through own funds. Chokkalingam expects a 2.5 times jump in net profit during FY17. The stock was locked in the upper circuit (no sellers, only buyers) to close at its 52-week high of Rs 40.55 on Wednesday.

The other south-based sugar company that analysts are positive on is Andhra Sugars. The company is looked at in a better light compared to peers in Tamil Nadu. While Tamil Nadu has seen a surge in cane procurement prices due to elections, Andhra Pradesh still offers a cost advantage. Chokkalingam points out that recovery rates (from cane) in Andhra are much higher. The stock that scaled to its 52-week high of Rs 222.50 on Wednesday closed at Rs 218.75.