Commodity update: Sugar

Commodity update: Sugar
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First Published: Thu, Sep 24 2009. 05 02 PM IST

Updated: Thu, Sep 24 2009. 05 02 PM IST
Two consecutive years of record sugar production in SY06 and SY07 (sugar year Oct-Sep) resulted in abnormally large stocks and depressed sugar prices in India. However, the cycle began to turn in SY09 and is expected to trend up for the next couple of years. This implies a sustained pattern of lower sugar inventories and positive pricing trends for sugar mills, much like the last cycle in SY4-SY06.
According to a report by Religare Hichens Harrison, domestic sugar inventory is expected to decline sharply from 5.9 months (of consumption) in SY08 to 3.1 months in SY09 on account of a drop in farmland acreage for sugarcane and farmer preference for alternative crops.
Click to read complete Religare report
Higher sugar recoveries are expected from crushed cane to compensate for the shrinking crop yields. But even though the industry expects a 9% rise in sugar production to 16 million tonnes (mt) in SY10 as against 14.7 mt in SY09, India will have to rely on imports to meet the demand.
The sugar industry witnessed a record production in SY06 and SY07 (sugar year Oct-Sep) resulting in abnormally large stocks and depressed sugar prices in India. However, the cycle began to turn in SY09, which is expected to trend up for the next couple of years. This implies a sustained pattern of lower sugar inventories and positive pricing trends for sugar mills, much like the last cycle in SY04-SY06.
India emerged as a net sugar importer in SY09 after a gap of three years, as demand outstripped supply. This trend is expected to continue in SY10 and SY11 as well. The research’s estimates peg India’s import requirement at a minimum of 6.2mt (assuming 2.5 months’ inventory) in SY10.
With the domestic retail price of sugar hovering at Rs33-34/kg and raw sugar imports priced at $ 550/t (Rs 30.5/kg), it is unviable to import rawsugar at current rates given that the cost of production stands at Rs30-31/kg.
Adjusting for sugar company and distributor margins, the retail price should rise to Rs35/kg for sugar mills to be profitable. As the demand-supply mismatch continues and imports represent the only solution, the odds are in favour of an increase in domestic retail prices.
On a conservative basis, the research has assumed that the non-levy sugar realization remains steady at current levels of Rs 31/kg and that levy realization rises to Rs20/kg for both SY10 and SY11.
Stock valuation
Considering the positive bias on sugar prices and expected buoyancy in the sugar cycle for the next couple of years, we initiate coverage on Bajaj Hindusthan and Dhampur Sugar with BUY ratings, and on Balrampur Chini Mills with a HOLD.
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First Published: Thu, Sep 24 2009. 05 02 PM IST
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