SAP hike: Cos to post losses in March qtr, says Antique

The Uttar Pradesh government today announced a hike in the state advised price (SAP) for sugarcane procurement at Rs 275-290 per quintal for 2012-13. SAP is the price below which mills cannot buy cane from farmers.

In an interview to CNBC-TV18, Nirav Shah, research analyst of Antique Broking, says the move will lead to sugar companies posting losses in the March quarter. "March quarter onwards, the numbers will show losses, because right now, in December they will be liquidating some amount of previous season’s inventory," he adds.

Below is the edited transcript of Shah's interview to CNBC-TV18.

Q: So the arithmetic doesn’t work at all? Will the companies go into the red?

A: Yes. Pretty much, because there is a Rs 40 per quintal increase in sugarcane cost . The previous range was Rs 235 to Rs 250 per quintal, but right now, the revised range is Rs 275 to Rs 290 per quintal. So, that takes your cost of production somewhere closer to Rs 33 to Rs 34 per kg.

Your current average realisation, if adjusted to the levy, would be coming to a similar range, plus one has to bear the interest cost. Companies will definitely make losses in sugar division at the prevailing sugar prices. March quarter onwards, the numbers will show losses, because right now, in December they will be liquidating some amount of previous season’s inventory, which is at a lower cost. Losses are definitely expected from the March quarter.

Q: What is the price at which they will break even? Or you don’t see that coming in at all?

A: As of now Rs 35 to Rs 36 per kg should be the break-even price. If adjusted for levy, the price comes to Rs 34 per kg and there is some room to cover interest costs, but in the intermediate term, sugar prices are unlikely to increase, because this is the peak season where your supply is at the highest.

Because of some working capital pressures, companies are facing or may be facing issue of liquidating inventory as and when they have to raise money, either to repay the farmers or to repay the banks. So, I think near-term pricing pressure will definitely be there. Any upward revision should be expected post March, not in the near-term.

Q: What about the positioning in terms of the sector? Renuka had earlier indicated their cane cost is also going to be closer to Rs 300 per quintal or so. In terms of positioning would you still favour the UP based millers or after this news announcement you could also have a look at Renuka because they would be on a similar footing?

A: Renuka, is a completely different case. They pay cane linked to sugar prices. The margins on the sugar business are more or less steady in Renuka whereas UP is more of a delta play. You capture the upside and you take a hit on the downside when your prices are weak. Comparing Renuka with Balrampur at this point of time is a completely different case, but yes, Renuka's domestic play will do much better in sugar business because it will be making profits. Renuka’s cane payments are linked to pre-determined formula, whereas the UP miller-based companies will be taking a hit from March quarter onwards.

Q: Do you think combined domestic and international business for Renuka is slightly better than Balrampur in terms of investment call?

A: To an extent yes, because overseas, the Brazilian business should gradually turn around. Right now the global prices are weak, but the Brazilian supplies as of now are over. The season is coming to an end. So hereon, you will have some better firming up of prices on the global front. The de-leveraging process will be a bit gradual, although the management is taking some steps, but that will be a two or three year process. So, definitely from that point of view, Renuka should do better in the near-term compared to Balrampur because of the over-hang here.

Q: Is there a hedge fund buy or a long-term investor buy on the expectation that the Rangarajan committee recommendations will some day come into force?

A: Doing away with the levy mechanism for the UP based companies, to make atleast some profits is very important. If that happens, then you will have some losses that are reduced because of the benefits one will get from selling sugar in the market price. UP based companies will definitely be hoping that atleast the levy part is accepted as soon as possible, so that they can get some relief from the pricing pressure.

Q: You still wouldn’t go long on that expectation?

A: As of now, no. However, as per my estimate for Balrampur Chini, the book value for FY14 is somewhere close to Rs 60-Rs 61. I think 0.75 to 0.8 times gives you a reasonable margin of safety in Balrampur Chini. Looking at that stock, Rs 48 to Rs 50 level is a good margin of safety at this point.