Sugar crisis: Stocks rally on formula hopes

One can play these stocks from a short-term perspective as the upside may not last too long, analysts say

Despite the sugar mills in Uttar Pradesh (UP) suspending operations following an impasse over the announcement of sugarcane price by the state, sugar stocks rallied at the bourses by as much as 19 per cent on heavy volumes. Reports suggest that the Central government is working out a formula to ease their concerns and financial burden and a Cabinet decision on the issue is likely in the next week.

UP sugar mills, which account for almost a third of the country’s total sugar production, have officially declared that the sugar industry in the state would not operate till the Rangarajan formula is adopted to fix the cane price, reports suggest.

Sugar industry in UP and Maharashtra — the two largest producing states — have not yet started crushing sugarcane in the new crop year, which started in October, citing mounting cane arrears and the inability to pay high price to farmers.

Last year, UP had fixed cane price at Rs 280 a quintal for the common variety. The mills still owe about Rs 2,400 crore to farmers for the 2012-13 season. In the current sugar year (2013-14), the mills claim, the paying capacity has come down to Rs 225 a quintal and any price above that will lead to arrears and losses to the industry.

The millers have been demanding the state fix “affordable” cane prices, in line with the recommendations of the Rangarajan Committee. They want the price at 70 per cent of the revenue realised from sugar, bagasse, molasses and press mud, or at 75 per cent of the revenue realised from sugar.

Sugar prices
Sugar prices (M-30 variety), which were around Rs 37 per kg in October 2012 are currently hovering around Rs 31 per kg (Rs 3,100 per quintal). With sugar recovery from cane at around nine — 10 per cent, the cost of sugarcane to produce a kg of sugar works out to about Rs 28-31. Add to that other production costs like power, transportation, wages, etc, as well as finance costs, sugar companies would end up making losses.

Reports peg India’s total sugar production in 2012 –13 (sugar year October – September) at 25.14 million tonnes (mt), with UP contributing 30 per cent in the annual production. Bajaj Hindusthan and Balrampur Chini, the biggest sugar players in UP, account for nearly half of the state’s sugar production.

Given that the sugar millers in the country could have high sugar inventory in their warehouses, analysts suggest that any shortfall in the sweetener is bound to see its prices escalate in the domestic market in the short-term.

“While there could be some increase in sugar spot prices in short-term following the crisis and general delay in crushing across the country, in the medium-term sugar prices will continue to remain under pressure,” said Janhavi Prabhu, analyst with India Ratings.

“The Indian sugar industry is sitting on an inventory of eight million tonnes and initial estimates for this crushing season for sugar production is 25 mt. Considering demand for sugar at 23 mt and taking best case scenario of two mt of exports country would land with inventory of close to eight-nine mt. Given the global surplus situation and higher inventory levels in India, sugar prices would remain under pressure for some more time,” Prabhu said.

With the general elections round-the-corner, analysts also suggest that the government will try to resolve the situation at the earliest.

“Most companies have a good inventory in their warehouses that can fetch better realisation if the sugar prices escalate. In my opinion, sugar prices will increase from the current levels. I think the government will ultimately have to relent and adopt a better pricing mechanism for cane, which will be linked to the sugar prices. Thus, cane and sugar prices will be linked and this is a fundamentally positive move as the farmers’ and consumers’ interests will be taken care of,” said Deven Choksey, managing director and chief executive, K R Choksey Shares and Securities.

Said A K Prabhakar, an independent market analyst: “I think the government cannot afford high sugar prices for too long, given that the country is gearing up for general election. The government will have to come out with a compromise price formula so that the farmers’ and the millers’ concerns are assuaged.”

Some reports also suggest that the industry may be given interest-free or loans at highly subsidised rates by the government to over-come their financial woes, given that many companies are saddled with high debt.

Stock strategy
Among individual stocks, Dhampur Sugar, Dwarikesh Sugar, Sakthi Sugars, Oudh Sugar Mills, Bajaj Hindusthan, Triveni Engineering, Simbhaoli Sugars, Balrampur Chini Mills, Dharani Sugars and Shree Renuka Sugars were the top gainers that rallied between 8 – 19 per cent on the Bombay Stock Exchange (BSE).

Choksey is not positive on the UP-based sugar stocks at the current juncture. However, he prefers south-based sugar stocks, especially EID Parry.

“Millers that do not have a presence in UP like AP Sugar, EID Parry, Shree Renuka Sugars, Dharani Sugars, Bannari Amman Sugars will benefit more from this development. On the other hand, those who have adequate stocks in their warehouses, despite being in UP, will benefit from sugar scarcity in case the (commodity) prices firm up. Of the lot, I like EID Parry, AP Sugar and Shree Renuka Sugars. One can play these stocks from a short-term perspective as the upside may not last too long," Prabhakar added.

Amar Ambani, head of research at IIFL, however, wants to play safe and suggests that investors should avoid these counters. “Sugar stocks would continue to react to ongoing news flow surrounding the shut down by UP-based mills due to high sugarcane prices; we would advocate a cautious stance and recommend avoiding sugar stocks at current juncture,” he said.