SHARETIPSINFO >>Research Reports >>SUGAR SECTOR (22-02-2009)

SUGAR SECTOR ENTERING THE BULLISH PHASE CYCLE:
Domestic sugar cycle follows a 5-7 years cycle. The downtrend in the sugar cycle starts with improved profitability of sugar mills, with higher and prompt payment to the farmers and hence low sugarcane arrears to the cultivators, higher area under sugarcane cultivation and bumper sugar production. All these leads to drop in sugar prices. Uptrend starts with increased availability of sugars, decline in sugar prices, lower profitability for mills owners, delayed payment to the farmers, high sugarcane arrears and thus farmers switch over to other crops resulting in lower cane production. All these leads to higher sugar prices and the cycle turns around.

DEMAND AND SUPPLY SITUATION IN INDIA:
The average domestic sugar price for the quarter ended on December 2008 increased by 35% YOY to Rs18.5 per kg. The sugar price in international market is currently $325 million tones or Rs16.5 per kg (fob). We assumed 28% decline in 2009 sugar production 19 million tones which is lower than the industry estimate of 20 million tones. The decline is expected to be steep in Maharashtra and Tamil Nadu with decline of 36% and 28% respectively in 2009. The production in UP is expected to decline by 19%in 2009.

UP SUGAR MILL AGREED TO PAY Rs140 PER QUINTAL FOR 2008-09:
Allahabad High Court on December 8, 2008 dismissed the private sugar miller petition against the cane price fixed by the state government at Rs140 per quintal for the current sugar year as against Rs125 the year earlier. A division bench said it was the prerogative of the state government to fix SAP. Sugar mills are paying between Rs140 and Rs 145 per quintal for the cane following the High Court decision.

TREND IN SUGAR PRICE:

WEAK CORRELATION BETWEEN WORLD SUGAR PRICE AND DOMESTIC PRICE:

OUTPUT PER TONES OF SUGAR CRUSHED:

PER CAPITA SUGAR CONSUMPTION IN INDIA:
India despite the second largest sugar producers in the world, the per capita consumption of sugar is among the lowest.

WORLD MAJOR SUGAR PRODUCER AND PRODUCTION:
Million  tones

OVERSEASA SCENARIO:
Expectation of lower sugarcane output in India and Brazil this year has pushed the price. Sugar is the only commodity that has shown the uptrend in the falling commodity price. According to the International Sugar Organization, global sugar output to decline by 4% to 161.6 million tons in the sugar season ending September 2009. In India the output is expected to decline by more than 20%.

KEY RISK:
INFLATIONARY PRESSURE:
Increasing sugar price could see government taking drastic action like banning sugar export or abolishing export subsidy, which could be negative for the sectors. As if now the inflation is under control so this fear is somewhat at bay. But if inflation again comes to haunt the Indian economy the harsh steps cannot be ruled out.

HIGHER CANE COST:
UP is the largest sugar producing state in the country, contributing 35% of the production. Government may go for deciding farmer friendly price in order to save their vote banks. This sort of play from the government part could reduce the profitability of the sugar companies.

COMPANIES OPERATING IN THE SECTOR:
BAJAJ HINDUSTAN- INTEGRATED PLAYER BASED IN UP.
BALRAMPUR CHINI- INTEGRATED PLAYER BASED IN UP.
SHREE RENUKA SUGAR- INTEGRATED PLAYER BASED IN SOUTH INDIA. MOST STARTEGICALLY PLACED TO EARN EXPORT INCOME.

CONCLUSION:
We are extremely bullish on this sector even in this bearish market. We expect sugar sector to outperform the broader market in 2009. We have in earlier report we have covered some of the best companies in the sugar sector which is expected to outperform.

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