Sugar companies on a roll

Lower output, carry-over stock set to push up prices further.

The good news has just got better for sugar companies. Buoyed by all-time high prices, the stocks of leading companies are already at 52-week high. Leading companies now expect prices to move up by a further 10-15 per cent due to lower carryover stock and lower production.

Ex-factory sugar prices in Uttar Pradesh (UP), the country’s second biggest producing state after Maharashtra, have jumped by nearly 50 per cent since the start of the 2008-09 season in October last year. The country’s output in the current season is at a three-year low of 14.7 million tonnes and down about 44 per cent from the previous season. The annual demand is estimated at 22 million tonnes.
 

GOOD TIMES
Sugar stocks that hit a 52-week high on June 12	Price (in Rs)

Bajaj Hindusthan232.40 Balrampur Chini110.50 Dhampur Sugars77.00 Renuka Sugars*152.40 Ponni Sugars59.40 Bannari Amman1200.00 *on June 11

However, the shortfall was largely compensated by the huge opening stock of 8-9 million tonnes. The opening stock at the beginning of the next season (2009-10) is expected at just 2-3 million tonnes. The current year of shortage follows two years of oversupply, when the industry bled with huge losses and the government had to provide mills assistance in terms of exports, interest-free loan and buffer stock to help them clear farmers’ dues.

The staggered payment to sugarcane growers and litigation over sugarcane price in UP left the farmers disappointed. The result is a 17 per cent dip in country’s sugarcane crop to 289 million tonnes, lowest in three years.

Companies, which are just out of two extremely bad years, are highly upbeat on the sector. “Even though acreage is marginally lower this time due to a lower ratoon crop, we expect yields and recovery to be better. Diversion to gur would be there, but it is expected to be lower than last time. Production is likely to be in the range of 18-20 million tonnes and fundamentally prices should remain firm,” said Nikhil Sawhney, executive director, Triveni Engineering and Industries, the country’s third largest sugar company. The company, which is also into turbine business, has also got orders from cooperative sugar mills in Maharashtra which are setting up bagasse-based power generation.

Experts, however, believe investors can still enter the sector though share prices have increased sharply in the recent past. “Sugar prices are unlikely to go much above the current levels but the profitability of companies would improve in the coming season on better recovery. At current levels, investors still enter and expect annualised return of about 25 per cent from the sugar sector,” said investment advisor S P Tulsian.

Fundamentally, prices are likely to remain firm the next season, which ends in September 2010. The industry expects the bull-run to continue. “Given the rising demand, the surplus cycle is getting squeezed in sugar. Even if production improves to 25-26 million tonnes in the 2010-11 season, the demand growth will keep prices stable,” said Sanjay Tapriya, director (Finance), Simbhaoli Sugars.