Sugar stocks have seen strong gains of 40-157 per cent from their beaten down levels at the end of September. The rally has been primarily fuelled by cyclical factors. The most crucial s the surge in sugar prices. International prices have gained 30 per cent after a gap of some years, as global output is likely to decline. Brazilian cane production remains affected by drought conditions and increased ethanol usage is likely to further reduce cane availability for sugar production. According to JPMorgan data, sugar output in China at 9.3 million tonnes (mt) is likely to be 11 per cent lower than last year’s, while the European Union’s production is also down 20 per cent.
For India, though it might continue to see surplus stocks, production is expected to decline compared to last year, owing to lower rainfall in Karnataka and Maharashtra. ICRA estimates production to be at 26.8 mt in the 2015-16 sugar year (October-September), 4.6 per cent lower than the 28.1 mt seen in the previous season. The likely fall in output, coupled with compulsory exports of four mt, might result in a significant decline in closing stocks to 7.6 mt this year from 10.1 mt in 2014-15, says ICRA. Thus, prices in the country have also surged, rubbing off positively on the share prices that have recovered, anticipating better profitability for companies.
While all these cyclical factors lead to improvement in realisations, fundamental reforms such as linking procurement prices of cane with sugar prices will play a crucial role in sustaining the stock price rally. Many companies, especially those having exposure to Uttar Pradesh, have seen stress on their balance sheet increase in the past few years.
Large producers such as Bajaj Hindusthan Sugar have seen its debt equity ratio rise from 1.59 at the end of September 2010 to 3.11 at the end of March 2015. Even players such as Triveni Engineering have seen debt-equity ratio rise from 0.92 at the end of September 2010 to 1.79 at the end of March 2015. This has largely to do with Uttar Pradesh that has seen state advised price (SAP) for procurement of sugarcane at Rs 280 a quintal (much higher than the Centre’s fair remunerative price of Rs 225) remaining unchanged for the past three years despite profitability of sugar manufacturers declining. Farmers in UP are demanding SAP of Rs 340 for the current year, which if approved will hurt companies. Thus, the SAP announcement by the UP government for 2015-16 sugar year will play a crucial role on the prospects for sugar producers based in the state.
Analysts feel till sugarcane procurement prices are not in sync with the sugar prices in the country, one might not see much improvement in the balancesheet of companies. Analysts at JPMorgan say linking input costs (cane pricing) to output prices (sugar realisation) will be key to improving industry profitability. Major reform for the industry that is required for sustained profitability is de-control and linkage of end sugar pricing to cane prices paid to farmers. In the absence of this, market signals are not reflected to farmers and, hence, production consistently remains high irrespective of demand. In UP, Balrampur Chini Mills remains the best placed among large caps given its balance sheet strength. Its debt-equity ratio at the end of March 2015 at 1.37 has remained stable compared to 1.24 at the end of March 2011, whereas the long-term debt to equity is only 0.40. Triveni Engineering has seen some rise in debt equity, but its net debt to equity ratio still remains low at 0.55; it has seen a sharper rise in its stock price. South India players are comparatively better placed than companies in the North. While the prices of sugarcane procurement are more linked to sugar prices, the conservative approach of players has helped maintain their balance sheet strength. For instance, Andhra Pradesh-based KCP Sugar and Industries has seen its debt equity ratio remain stable at 0.41, whereas the long-term debt to equity ratio is at 0.23.
The Centre recently approved transfer of Rs 4.50 for every quintal of cane crushed into the bank accounts of sugarcane farmers directly. This move is a bold decision, says Abhinash Verma, director-general, Indian Sugar Mills Association. While the financial implications might not be significant immediately, it takes away some burden of the millers.