Beverages (Alcoholic): "Input cost fall could be delayed but deeper" says BoA ML

Beverages (Alcoholic): Input cost fall could be delayed but deeper


􀂄 Sugarcane production estimate moves up again
Based on the latest Govt of India estimates, sugarcane production in India has
been again revised upwards to 347mT, up 25% yoy. This is higher than our
assumption of a 20% increase in sugarcane production. Channel checks suggest
that final production could be as high as 30% up yoy. Higher growth could lead to
a positive surprise on our molasses price drop assumption of 20% in FY11 and
10% in FY12.
But price fall could be back ended due to delay in crushing
Currently, molasses price declines have been lower than forecast (10% vs est of
20%) on expectations of delays in sugarcane crushing and lower yield in U.P
(~25% share of production) due to floods. We are not concerned with this
development as 1) current trading volume of molasses is negligible due to off
season 2) delay in crushing would lead to bunching up of supply in Mar Q leading
to a sharper decrease in prices, making up for more moderate reductions in Dec
Q and 3) sugarcane yield is relevant for sugar production and not for molasses
production which is a by product.
Ethanol blending yet to take off; Rise in demand priced in
Supply of ethanol is expected to begin by mid-Nov (vs announced date of 1st Oct)
only after the crushing begins. Also, due to technical reasons only 70% of demand
has been tied up by Oil Marketing Companies as of now. ENA/Molasses prices
have moved up 5-10% since announcement of the program. Also, demand from
ethanol is factored into our demand – supply scenario. Hence, we believe going
forward actual sugarcane production would be the key price driver of molasses /
ENA and not demand for ethanol which is now already factored in.
Sugar deregulation, high global prices could be positive
We believe the current global shortage of sugar and resultant high prices could
lead to a longer sugar cycle in India. Initial steps towards sugar industry
deregulation in India make us believe that sugar exports from India could be
allowed. This should improve realizations of Indian sugar manufacturers and allow
them to pay a higher purchase price for sugarcane. This could incentivize
sugarcane farmers not to rotate out to growing alternative crops and maintain high
supply of sugarcane beyond the typical two year sugarcane cycle in India.
Maintain our molasses price estimates; could be back ended
Despite molasses moving up marginally in September, we maintain our estimate
of a 20% decline in molasses prices in FY11E and further 10% decline in FY12E.
We recognize the possibility of price declines getting pushed back towards Mar Q
rather than in Dec Q due to delay in crushing and overhang of additional demand
from ethanol blending of fuel. However, with actual sugarcane production
expected to beat estimates and bunching up of excess supply in Mar Q, we
e xpect a sharper than expected fall in molasses prices, making up for the delay.