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Sugar (Sugar prices to remain firm, Bottomline back to
black) Positive
The sugar sector is expected to witness an improvement in fundamentals
led by 30-year high global prices increasing to 34c/lb and firming domestic
prices at | 31/kg from | 24/kg in June, 2010. Also, the higher availability of
sugarcane is expected to pass on bargaining power in the hands of millers
and keep their costs low at | 22/kg of cane in comparison to | 28/kg paid in
SY10. We remain positive on Shree Renuka Sugars on the back of positive
earning outlook from Brazilian operations. We are also positive on
Balrampur Chini and Dhampur Sugar as valuations are at the lower end of
the replacement cost band.
⇒ The outlook for global sugar surplus has been cut to 2.3 million
tonnes (MT) from 3 MT earlier for CY11 on lower than expected
production in major sugar producing countries (Brazil and India).
Simultaneously, Thailand, China, Russia and Pakistan turning net
importers due to erratic weather conditions has aggravated the
situation further driving up global sugar prices to 34c/lb. Hence, we
believe mismatch in demand-supply will persist until March/April
2011(start of crushing in Brazil), keeping global prices firm. Also, until
exact production for India is out by March (end of crushing in India),
even domestic sugar prices would remain firm at around | 31/kg
⇒ Further, the export of 1.5 MT (1 MT under advance licence scheme
and 0.5 MT under open licence scheme) allowed by the Indian
government has resulted in sugar prices firming up to | 31/kg in
India. As announced by the government a further 1.5 MT of sugar
exports could be allowed once total production, after crushing is
over, is known. We believe this could result in a subsequent increase
in domestic sugar prices in the second half of the year as the
inventory level remains at ~4 MT (two months of consumption) only
⇒ Shree Renuka Sugars remains our top pick considering strong
earnings from its Brazilian operations. Earnings growth of 22%
(CAGR) from SY09-SY12E and higher cash flows would result in a
reduction of debt and higher valuation multiple. We are also positive
on Balrampur Chini as the stock is trading at the lower end of its
valuation multiple. Currently, Balrampur Chini and Dhampur Sugar
are trading at a discount of ~4% and 56%, respectively, to their
replacement cost. However, we continue to remain bearish on Bajaj
Hindustan due to high interest cost on the huge debt (| 4059 crore)
on the books
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