Mumbai: Sugar stocks have underperformed the broader market since the beginning of 2010 as investors dumped shares on concerns a more than one-third fall in sugar prices will hurt profitability.
Analysts said prices, which had nearly doubled last year, have now plunged below production cost, pressuring margins of sugar makers.
Sugar stocks including Bajaj Hindusthan, Shree Renuka Sugars, Balrampur Chini, Dhampur Sugar and Dwarikesh Sugar have lost 30-55% value since the start of 2010.
The benchmark 30-share BSE index has remained flat in the period while the CNX Midcap index has risen 7%.
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Brokerages such as Angel Broking and Morgan Stanley have downgraded the sector on worries prices will remain weak, going forward.
ICICIdirect.com has cut price target for Shree Renuka, while IndiaInfoline has downgraded Balrampur Chini to ‘hold´ after it posted poor quarterly numbers.
Balrampur posted a near 60% drop in quarterly net profit in Jan-March, Dhampur’s net profit dropped 29% while Simbhaoli Sugar posted a loss in the period.
“They are hardly making any profits at these levels. If prices fall to 24 or below it would actually be a loss situation, Sageraj Bariya, sector analyst with Angel Broking, said.
“Besides, farmers have huge incentive to go and cultivate more cane now. We think there may be an upward revision in 2012 production figures and that will put further pressure on prices,” Bariya who has a ‘sell´ rating on Bajaj Hindusthan said..
Of 16 analysts tracking Bajaj Hindusthan, 8 have rated it ‘sell’, while 5 have a ‘hold´ rating on it, according to ThomsonReuters Estimates.
The world’s biggest consumer is likely to produce 18 million to 18.5 million tonnes in 2009-10 season ending in September, significantly higher than initial estimate of 14-15 million, pressuring prices.
Shree Renuka Sugars, India’s top refiner, continues to be a favourite with analysts as its recent acquisitions in Brazil and dependence on raw sugar imports will help it post better numbers than peers who are more dependent on cane supply from farmers.
“With the integration of companies acquired in Brazil, Shree Renuka will stand to benefit as these will provide easy access to raw materials,” Rishab Bothra, analyst at B&K, said in an April report. It has a ‘buy’ rating on the stock.
Of 11 analysts tracking the firm, 6 have rated it as ‘strong buy´ while 3 have a ‘buy´ rating on it, according to ThomsonReuters estimates.
Shree Renuka’s mills are based in southern and western India, where it can cut the procurement cost of cane next year while most others in Uttar Pradesh cannot, said Sanjay Manyal, analyst at ICICIdirect.com.
“They (government) put too much of restriction, they probably will ease all those restrictions as prices have come down,” Manyal said.