Sugar plunge squeezes margins; Time to sell?

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Sugar plunge squeezes margins; Time to sell?

Indian 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

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Indian 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 %.

Sell - opportunity to exit

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 I/B/E/S 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.

Buy - some interesting picks?

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.