Prabhudas Lilladher reiterates negative stance on sugar

“We met with the Maharashtra State Co-operative Sugar Factories Federation recently to take sense on the present sugar situation of India, especially Maharashtra (MH). Key highlights of the meeting are as follows:

India is likely to see sugar production of 25.5m‐26m in SS12: India’s sugar production was up by 13.2% YoY to 23.2m MT as on March 31, 2012. UP, MH, Karnataka (KN), Tamil Nadu, Andhra Pradesh and Gujarat have achieved sugar production of 6.6m, 8m, 3.5m, 1.2m, 1.1m and 0.9m, respectively, as on March 31, 2012. In India, total 385 mills were running as on March 31, 2012 v/s 329 mills during the same time in the previous year. Sugar season (SS) 2012 started with the opening balance of ~6m MT. India is likely to achieve sugar production of ~25.5m-26m MT during SS12. Production estimate is in line with the projected estimate of government and Indian Sugar Mills Association (ISMA). Consumption is likely to grow at 4%-5% YoY to ~22m MT. Government has already allowed sugar export of ~3m MT in the present season. Hence, India has surplus sugar of ~7m MT at the end of SS12. Federation expects the government to carry the sugar inventory of three months i.e. 5m-6m MT at the end of the present season. Hence, government should allow further 1.5m-2m MT of sugar export in the near term. Further, Federation believes that sugar production is expected to be marginally lower in SS13 to ~25m MT on account of lower sugarcane yield considering normal weather/climatic conditions. At present, domestic sugar prices (ex-factory) are Rs27-28/kg in KN/MH and Rs29-30/kg in UP. Sugar players are incurring losses of Rs2-3/kg in their sugar segment on account of higher sugarcane prices.

Maharashtra sugar production is up by 9.5% YoY: As on April 10, 2012, MH has crushed sugarcane of total 72.3m MT (up by 7.2% YoY). Sugar production was up by ~9.5% YoY to 8.4m MT (SS11 -9m MT) with the average recovery of 11.6%. During SS12, 170 sugar mills (v/s 162 in SY11) have crushed sugar and out of this, 62 mills have already completed crushing as on April 10, 2012.

Outlook: We are reiterating our ‘Negative’ stance on the sugar sector considering a surplus sugar year and higher cane cost leading to incremental burden on companies’ financials, primarily domestic focus players like Balrampur Chini (BRCM). Within the sector, we prefer Shree Renuka Sugar (SHRS). We maintain our ‘Reduce’ rating on BRCM and ‘Accumulate’ rating on SHRS. Any positive policy outcome in the future would be a key risk to our view.      

FIIs holding more than 30% in Indian cos

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