We met the Maharashtra State Co-operative Sugar Factories Federation recently to make sense of the present sugar situation in India. Here are key highlights of the meeting.

Production

India’s sugar production was up by 13.2% year-on-year (y-o-y) to 23.2 million tonnes (mt) as on 31 March. Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh and Gujarat achieved sugar production of 6.6 mt, 8 mt, 3.5 mt, 1.2 mt, 1.1 mt and 0.9 mt, respectively, as on 31 March. In India, total 385 mills were running as on 31 March compared with 329 mills in the same period in the previous year. Sugar season 2012 (SS12) started with the opening balance of approximately 6 mt. India is likely to achieve sugar production of about 25.5-26 mt during SS12.

Production estimate is in line with the projected estimate of government and Indian Sugar Mills Association (Isma).

Consumption

Consumption is likely to grow at 4-5% y-o-y to about 22 mt. The government has already allowed sugar export of about 3mt in the present season. Hence, India has surplus sugar of about 7 mt at the end of SS12. The federation expects the government to carry the sugar inventory of three month, which is 5-6 mt at the end of the present season. Hence, the government should allow further 1.5-2 mt of sugar export in the near term.

Further, the federation believes that sugar production is expected to be marginally lower in SS13 to about 25 mt on account of lower sugarcane yield considering normal climatic conditions.

At present, domestic sugar prices (ex-factory) are Rs. 27-28 per kg in Karnataka and Maharashtra and Rs. 29-30 per kg in Uttar Pradesh. Sugar companies are incurring losses of Rs. 2-3 per kg in their sugar segment on account of higher sugarcane prices.

Also See | How it Fared (PDF)

Outlook

We are reiterating our negative stance on the sugar sector, considering a surplus sugar year and higher cane cost leading to incremental burden on companies’ financials, primarily domestic focus companies, such as Balrampur Chini Mills Ltd (BRCM). Within the sector, we prefer Shree Renuka Sugars Ltd (SHRS). We maintain our reduce rating on BRCM and accumulate rating on SHRS. Any positive policy outcome in the future would be a key risk in our view.