Sugar Industry : Outlook

With global prices of sugar firming up, the outlook on the entire sector has vastly changed, putting India in an advantageous position. Raw sugar prices have moved above 28 cents per pound and white sugar, above US $ 708 per Metric ton. With drought in Brazil and floods in Pakistan, the global supply is expected to remain lower. With demand picking up from Russia, China, Pakistan, Sri Lanka and other neighboring countries, and with surplus production expected in the country in season 10-11, India will be able to take advantage of this, by exporting sugar to its neighboring countries.

On import parity price, cost of sugar works out at Rs. 35.50 per kg. in India, while it is sold at Rs.25 per kg. Even if we take price of sugar ex-London, it works out at Rs. 32 per kg., against average domestic price of Rs. 26 per kg. in India. So, in due course of time, this gap is likely to get bridged, with domestic prices of sugar, likely to move to around Rs. 30 per kg., ex-mill, by December- January. This amounts to an increase of about Rs. 4 per kg., which is seen quite respectable, by the industry.

Apart from global drought in sugars, bumper crop owing to good monsoon, free pricing of sugar ( thanks to Agri Minister Pawar ), export prospects of sugar and better price for ethanol are likely to fuel up the profits of Indian sugar companies : so will be the stock price of sugar companies which have not rallied in the past.

Hence, the sector is likely to see all the positives in the season, which will start crushing from the first week of November in Karnataka and Maharashtra and from middle of November in U.P. Crushing, in this season, is likely to last till middle of May, due to better availability of sugarcane in all the states.

In the given situation, our preference lies first for the company which has global presence as well. In this category, only Renuka Sugar falls, having acquired two mills in Brazil, which has its season running between April to December.

Thereafter, the Karnataka based sugar mills will have advantage, because of better recovery of close to 12%, with cane price expected to remain reasonable at around Rs.220 per quintal. Renuka, Ugar and EID Parry fall in this category.

Thereafter, the companies those who are likely to get export entitlements, against raw sugar having imported by them in the past, will stand to gain. In this category, Renuka, Sakthi, Ponni, Dharni and EID Parry get covered.

Thereafter, Tamil Nadu based sugar mills will also be in a better situation and companies to gain would be EID Parry, Sakthi, Ponni, Dharani, Bannari Aman and Thiru Arooran.

For U.P. mills, it would be better to see the SAP for sugarcane getting announced by the state government, which is likely by the end of this month, as Panchayat elections in the state are likely to be completed by 25th October. One can keep an eye on Triveni, Balrampur, Bajaj Hindustan, Simbhaoli, DCM Shriram Consolidated, Dhampur, DCM Shriram Industries, Mawana Sugars etc.

So, better days are seen ahead for the sugar sector in India, for this entire season. Though the stock markets may correct, since the sugar stocks have not rallied in the past, they may not fall much. On the contrary, they may defy gravity and move upwards.