Only partial decontrol of sugar a likely possibility

With only partial decontrol in most likelihood, Integrated Sugar players to reap more benefits.

Sugar Stocks have tumbled on the bourses as profitability took a hit in the current season. Bajaj Hindusthan trades 32.05% lower while Shree Renuka and Balrampur chini trade 42.71 and 27.19% on the bourses since start of the sugar Year (October’12).

As Sugar cane yield were affected in the states of Maharashtra and Karnataka by scanty rainfall, the yields in Uttar Pradesh too came lower than estimated. Thus the production estimates for FY13 were tweaked from 26.5 MT at the start of the Sugar season to around 24 MT now. The Sugar prices that had spiraled initially however declined from Rs 39 a kg to around Rs 34 a kg in the markets. While the prices declined, sugar cane procurement price was hiked by the state governments. Uttar Pradesh saw the State Administered Price (SAP) going up by Rs 40 a quintal to Rs 28 a quintal in the current Sugar year. This was much higher than the central government’s Fair and Remunerative Price (FRP) of Rs 170 a quintal and hence the profitability of North based sugar producers was bound to feel the heat.

The hopes now are lying on the much talked about sugar decontrol. Analysts feel that while complete sugar decontrol may not happen however looking at the plummeting profitability of the industry, government may consider partial decontrol.

Analysts at Antique stock broking observe that “We are of the opinion that partial decontrol of the sugar sector is inevitable and will be approved by the Cabinet when the proposal is presented. By partial decontrol, we mean that the levy mechanism will be abolished and the release mechanism will be scrapped.”  Even if the same happens the respite may come to the industry and specially the integrated players.

The integrated players will benefit more simply as the benefits of the government mandating Oil Marketing Companies to blend 5% ethanol with petrol at the pan India level and the shift from a fixed ethanol pricing system to market driven pricing system will also benefit them. The step in the right direction for the industry as per analysts creates a room for at least 20% increase in ethanol price from the current Rs 27 a liter. However to reap the benefit players should have a distillery to produce alcohol and hence integrated players will draw larger benefits.

Analysts at Antique Stock broking prefer to play the developments through Balrampur Chini Mills as it is the most efficient sugar manufacturer in UP, has optimum integration level (a play on rising ethanol price as well) and has a very healthy balance sheet (Long term debt: Equity of  around 0.47x). They reiterate target price of Rs 56 on Balrampur chini (current Market Price Rs 48.60).

The next pick remains Shree Renuka Sugars with Target price of Rs 35 as analysts feel the efforts to deleverage the Brazilian operations would yield results though over the next two years.