Sugar production updates continue to point downwards. With Maharashtra and Karnataka, two important states for production, being impacted by low rain, output is likely to decline for a second year. This has led to a rally in sugar prices.
CARE Ratings says prices were ~35-~35.8 a kg between September 1 and December 22, 2016. These rose to ~37.5 a kg by January 6 and a high of ~39 a kg on January 13. This was reflected in stock prices; many companies based in Uttar Pradesh, such as Balrmapur Chini and Dwarikesh Sugar, hit 52-week highs and others such as Dhampur Sugar and DCM Shriram continued to trade firm.
This bodes well for profitability of the manufacturers. However, as prices continue to rally, the risk of government measures to control prices and increase availability also rise. One measure could be import duty reduction.
The import duty was raised two years earlier to 40 per cent, from 15 per cent, when there was excess supply. These could now be reduced. The country had 7.7 million tonnes (mt) of inventory at the end of 201516, expected to decline to six mt and less at the end of 201617. With less than three months of carryover inventory being anticipated, there are more reasons to encourage import.
Global prices are currently close to $0.2 a pound or ~30-31 akg. Import duty at 40 per cent would translate into landed cost of around ~42 a kg. This with transport charges from origin to port and then to the final destination makes import acurrently unviable option. However, if the duty is reduced to 15 per cent or to nil, the landed cost will be ~34.5-30.
In such a scenario, it would cap further gains for domestic manufacturers. However, even after some correction in prices, they will continue to report good profit. The bigger gains will accrue to UP-based producers, as sugarcane availability remains good there.
Last week, Indian Sugar Mills Association (Isma) reduced its production assessment for the ongoing sugar season, 2016-17 (ending this September), to 21.3 mt, down nine per cent from the earlier 23.4 mt. Till January 15, said Isma, mills in Maharashtra saw 28 per cent decline in sugar output; UP-based entities saw a31 per cent rise.
However, UP has also a rise in the government-set State Advised Price for procuring cane, by ~25-35 a quintal. This would take away some of the gain from higher realisation and output. Analysts at JM Financial say the domestic exmill realisation bottomed decisively in August-September 2015 (~27-28/kg in UP) and rose to ~34-36/kg.
Thus, for stock investing, Balrampur Chini, Bajaj Hindusthan, Dwarikesh Sugar, Dhampur Sugar, DCM Shriram, etc, could be considered, say analysts. EID Parry is also well placed.
However, looking at the recent rally and expectations of government measures to control prices, investors should look at share price falls on when to enter the stocks, on a select basis.
Uttar Pradesh-based players such as Balrampur Chini, Bajaj Hindusthan and Dwarikesh Sugar better placed; use stock corrections in deciding to enter market, say analysts
Production Closing stock
SY2012-13 25.1 9.3 SY2013-14 24.7 7.5 SY2014-15 28.3 9.1 SY2015-16 25.2 7.7 SY2016-17E* 22.5 4.7
E: Estimates; SY: Sugar year (October 1 to September 30) *Isma has estimated itat21.3 mt Figures in million tonnes Source: CARERatings
TRACKING INVENTORY
(Base=100) Feb 1, 16 Jan 30, ’17 160 140 120 100 80 (Base=100)
SugarM-30 BS SugarIndex