The paradigm shift in acreage away from sugarcane coupled with delays in cane payment arrears has induced cyclicality in the production of cane, thereby, delaying the commencement of the crushing season.
With the country witnessing an unprecedented rise in sugar exports from1.5 MT in SY07 to 4.8 MT in SY08, shrinkage of the sugar surplus to 6.1 MT at the end of SY09 and 1.1 MT at the end of SY10 is imminent.
In anticipation of the deterioration in supply, we believe sugar prices will continue to remain firm above Rs17 per kg in SY09 and will witness a further price increase to Rs19 per kg in SY10 indicating a steadily improving trend.
The decline in crude oil prices has brought into question the viability of ethanol. This radical decline in crude prices will adversely affect the demand for ethanol, which could, in turn, prompt Brazilian mills to divert production from ethanol to sugar.
This phenomenon will result in a lower sugar deficit in 2008-09 and, thus, exert further pressure on global sugar prices. Higher sugar production in Brazil poses a significant risk to Indian imports, which, in turn, could persuade domestic manufacturers to keep sugar prices down.
Policy risks have always been a overhang on the sector, with the key regulations related to cane procurement, cane prices and sugar prices.
However, sugarcane prices continue to be a contentious issue particularly in Uttar Pradesh where there is a lack of clarity on prices.
Currently, the UP government has fixed the state advised price (SAP) for the 2008-09 sugar season, at Rs140 per quintal against last year’s price of Rs110 per quintal connoting a highly negative stance for the industry.
We expect sugar prices to remain firm on the back of a lower supply. Additionally, we also believe higher domestic sugar prices will result in robust earnings growth.
Higher realizations in rectified spirits and alcohol will also increase revenue contribution from by-products.
As a result, we prefer Shree Renuka Sugars on account of the location of its mills in Maharashtra and Karnataka where cane prices are linked to sugar realizations.
With its reduced dependence on the core sugar business, the possibility of a reduction in import duties of raw sugar and an increasing contribution coming from renewables, particularly ethanol we believe Shree Renuka Sugars with a differentiated business model is well positioned to gain in a rising sugar price scenario.
Additionally, we also like Balrampur Chini with its moderate debt and enhanced operational efficiency.