Sugar stocks still not out of the woods

The ethanol price decision will have limited benefits; prospects will look up only with a revival in the sugar cycle

The Cabinet committee's decision fixing ethanol prices at Rs 48.5-49.5 a litre bodes well for sugar-producing companies. The move has seen sugar stocks zoom seven-eight per cent. While this price is much higher than Rs 29 a litre, which state-owned refiners currently pay to buy ethanol for mixing with fuels, it is also higher than the anticipated Rs 40-43 a litre by the Street. The move, however, does not allay all concerns including the implementation of blending. The fall in crude-oil prices has only added to the concerns. Further, even if ethanol blending is implemented, it will only provide a limited boost to the overall profitability as alcohol and other bi-products contribute not much to consolidated revenues and profitability. Alcohol revenues were 11-12 per cent of the consolidated revenues for Balrampur Chini Mills in the last financial year. Thus, it is only a turn in the sugar cycle that is imperative for improving the prospects, even as the ethanol price-rise decision provides some respite. The stocks gained last Thursday, but declined afterwards. Analysts, too, have not upgraded their earnings estimates and are in a wait-and-watch mode, despite most working with ethanol price estimates of Rs 40 plus.

Positives
The government's decision bodes well as earlier the oil marketing companies (OMCs) used to float tenders and negotiate ethanol prices. Now, the prices are pre-decided. Also, while sugar companies used to quote smaller volumes, looking at the uncertainties on procurement and prices, these will now start quoting more volumes. Abinash Verma, director-general, Indian Sugar Mills Association (ISMA), says the one important difference it will make is excise permits will now be granted for a year; earlier, these were on a monthly basis. It will be provided by customers (OMCs) and not sugar producers, easing regulatory issues of the companies.

Concerns
Analysts remain concerned on implementation. They say the government in November 2012 mandated five per cent blending of ethanol in fuel. But refiners are yet to achieve this due to supply and pricing issues. Sageraj Bariya at East India Securities says he has been hearing about the blending programme for so many years, but it has still not been fully implemented.

Analysts say the programme was started when oil prices were high, but now prices have fallen a lot. So, there are doubts OMCs might not be too keen to mix ethanol with fuel now. Verma says calculations show oil companies will still be saving Rs 4-5 a litre by blending. Thus, while the level of implementation will be watched, analysts say the decision has set the floor price for ethanol. This is positive for sugar producers as it will allow these to take a long-term call on production.

Sugar cycle yet to turn
With the Uttar Pradesh government keeping the state administered price (SAP) for sugar cane at previous two years' levels (Rs 280 a quintal) and giving further incentives, it has been able to resolve the stand-off with millers and crushing has started. However, sugar production is expected to be much ahead of demand, adding to the country's surplus. The domestic production that stood at 24.5 million tonnes (mt) in sugar year (SY) 2010 (November-October) has remained at 24 mt-plus and is expected to come to 25-25.5 mt in the current sugar year, helped by higher crop area in Maharashtra and Karnataka. On the other hand, consumption at 20.8 mt in SY10 has increased to 23-23.5 mt in the current sugar year. Thus, the surplus is likely to continue. Analysts at HDFC Securities say the surplus supply (production of 25.5 mt versus consumption of 23.5 mt) will keep prices muted. Analysts at CARE Ratings don't see the ethanol price revision as a game-changer for the sugar sector.

Though one-year target prices suggest there is an upside potential, it might not be the case. Also, sugar prices, both locally and globally, are under pressure: Global prices are near five-and-a-half year lows, while Mumbai sugar prices are near three-year lows.

Though analysts remain cautious on all companies, they are slightly positive on Balrampur Chini, going by its strong balance sheet. While Bajaj Hindusthan has strong production and domestic presence, the low profitability and the higher interest outgo are likely to keep the profit under pressure. For Shree Renuka Sugars, high exposure to the international market (weak prices) and high debt will hurt profits.