Mumbai: Indian sugar firms will see a profit surge in the year to September 2010 on soaring prices of the sweetener, and refiners, who sourced their raws cheaper, are set to outdo the sector, industry watchers said.
Shree Renuka Sugars, a major refiner, is amongst the top picks of most brokerages including India Infoline and Reliance Equities.
Dhampur Sugar and Balrampur Chini Mills, who have a business model that include crushing, distillation and co-generation, are other favourites.
“They are making super-normal profits and will continue to do so for the next two years,” said Pranshu Mittal, a sector analyst at Centrum Broking, referring to sugar firms in India.
Mittal bets on Balrampur, which he estimates would post a net profit of Rs3 billion for the sugar year 2009-10 on the price rally and higher power tariff from its co-generation units.
Brokerage ICICI Direct sees Balrampur’s FY10 net profit at Rs2.7 billion against a consolidated net profit of Rs783 million in the year-ending September 2008.
Dhampur Sugar posted a net profit of Rs35 million in FY08, while rival Shree Renuka made 1.3 billion in the period. Millers use the sugar year to September as their fiscal year.
A Mumbai-based analyst, who declined to be named as he was not authorized to speak to the media, rated Shree Renuka and Dhampur as ‘top picks´ for already locking in cheap raw imports.
“Shree Renuka will be the largest sugar producer in India next year. They have booked imports at very low prices, so definitely, they are going to be the biggest beneficiary of this spike in sugar price,” the analyst said.
Every rise of a rupee in the spot price of sugar will add Rs900 million to Shree Renuka’s net profit, he added.
In Kolhapur, a key market in top producer Maharashtra, the most traded S-variety sugar is up 27% in August alone. It has surged 61% since January.
“We are heading towards the peak festival season. Demand will further improve in September due to Diwali,” said Ashok Jain, president of the Bombay Sugar Merchants Association.
“There is still wider scope for an upside. Supplies are unlikely to improve in short-term.”
Blowback from farmers
Shares in Shree Renuka and Balrampur Chini have more than doubled since April, while Bajaj Hindusthan, Dhampur and Simbhaoli multiplied their value several times over, while the 30-share BSE index has risen by half.
However, India’s sugar deficit has also pushed up prices of global raws to 28-year highs, making fresh imports unviable for Indian millers, officials said.
Locally sourced cane will mirror world markets and become dearer for millers. Though the government fixes the minimum price at which millers can procure cane, in a boom year farmers are likely to demand their share, and raise prices.
The government has already raised the minimum price that mills must pay to farmers by a third to a record Rs107.76 per 100 kg for the new season starting October.
“This year, there is going to be a fight for sugarcane. I won’t be stunned if millers pay Rs200-220 to farmers. Profitability of sugar producers, who haven’t imported, will take a hit as they may have to pay more,” another analyst said.