Is Sugar cycle near bottom for next Structural up move?
Key Investment Arguments
- Sugar cane crop in the country appears to have reached near peak level: Major upside potential for sugar cane crop from current level of 343mnt appears limited. Negligible addition to cultivated land, rising profitability of farmers from other competing crops, increased cane arrears during SY12 in UP will limit further addition to cane cultivation and stable drawal rate. Below average monsoon expectation in Maharashtra and high cane arrears in UP likely to affect sugar cane production mainly in SY13e.
- Steadily rising demand vs. near stable crop: SY12 sugar production of 26mnt appears to be near peak level considering stagnant acreage towards cane and stable drawal rate. Going forward Way2wealth expects sugar production go down to 23.5mnt in SY13e level. Sugar demand is steadily rising at 3% reaching 22.5mnt in SY12. Reducing demand supply gap within domestic market will reduce inventory level within system. However with somewhat lower crop in SY13 season and expected reduction in drawal rate, Way2wealth expects sugar inventory to reduce from current level of 5.9mnt to 5.7mnt by FY13e and 5.0mnt by SY14e. This is likely to push prices upward going forward over next 1-2 years.
- Levy quota likely be withdrawn or lowered: Much hyped positive expectation for the industry is de-control of the industry wherein, near term possibility is withdrawal of levy quota or lower % of levy sugar as per production and stocks available with government. Currently sugar companies are selling 10% of their production at Rs1970/qtl which is 35% below market price. There is expectation that Govt. will likely lower levy quota by atleast 5% or may withdraw completely. This will benefit around Rs1200-2500cr to the industry.
- By-products profitability: Power and distillery play very important role in improving profitability of the mills. Rising import bill makes ethanol blending attractive thus, improving demand prospects for distillery. Prolonged coal deficit in the country is shifting focus towards alternate fuels improving prospects for co-generation. Most of sugar refineries have signed PPA with State Electricity Boards (SEBs).
- Exports: India is likely to export around 3mnt of sugar in SY12e. Out of this, industry has already expected around 2.5mnt by June 2012. Exports of around 5mnt over last two years helped reducing countrywide sugar inventory which has prevented sugar prices sliding down.
- Conclusion: It appears that worst for domestic sugar industry is over and sugar prices have upside potential from current level over long term. Domestic sugar cane crop appears to have reached peak level with marginal upside due to limiting factors such as limited addition to cultivated land, rising profitability of alternate crops and stable drawal rate. It also faces near term challenges in terms of below average expected monsoon for 2012 and rising cane arrears in UP.
- Domestic consumption of sugar is rising at a steady pace of 3% reaching 22.5mnt in SY12. Surplus in the domestic market during last two years is absorbed globally with exports reaching around 3mnt in SY12. Thus, country is likely to end SY12 with inventory level of 5.9mnt. Reducing production and rising consumption to reduce inventory level to 5.7mnt and 5.0mnt in SY13e and SY14e respectively.
- Reducing inventory level is likely to push sugar prices upward in the long term. Sugar companies stock prices are at trough level discounting major concerns thus, any positive would lead to re-rating of the stocks. Way2wealth has a long term POSITIVE view on the sector. Companies which Way2wealth prefers in the sector are: 1. Balrampur Chini Mills Ltd. 2. Dhampur Sugar Mills Ltd. 3. Triveni Engineering & Industries Ltd
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