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Sugar - ƒ Sugar realisations improved
Global sugar prices have risen from 24 cents/lb in October 2010 to 32
cents/lb in January 2011 as sugarcane production in Brazil is likely to
be 560 million tonnes (MT) from the earlier expectation of 605 MT due
to the extreme dry whether conditions. Simultaneously, domestic
sugar prices have improved from| 27 per kg to | 31 per kg as
domestic production is expected to be 24.5 MT against the earlier
expected 25.5 MT in SY11. We believe higher sugar realisation would
result in a substantial improvement in operating margins.
ƒ Volumes to improve YoY but dip QoQ
Sugar millers with domestic operations would witness a YoY increase
in volumes. However, QoQ, it would fall as millers were holding high
inventories in September 2010 in expectation of higher realisations.
We believe companies would witness high volume growth in Q2SY11
(compare to Q2SY10) on increased availability of sugar and higher
realisations from exports (the government has allowed 1.5 MT of
export in SY11). Shree Renuka Sugars would witness an increase in
sales volumes as contribution from Renuka do Brasil and VDI
(acquired companies) would increase substantially.
ƒ Sugarcane cost to remain at | 22 per kg
UP state government has fixed state advise price (SAP) for sugarcane
at | 205 per quintal while central governments fair and remunerative
price (FRP) remains at | 139 per quintal. We believe implicit
sugarcane cost (considering average recovery rate at 10%) for millers
would not increase above | 22 per kg as availability for sugarcane is
higher. This would result in higher margins for the companies.
ƒ Gross margins increase
With sugar prices at ~| 30/kg and sugarcane cost at ~| 22/kg, gross
margins for millers have increased to | 8/kg. This is equivalent to the
margins in Q1SY10. We believe the companies would be able to
sustain these margins in SY11 as the sugarcane cost will not increase
due to higher availability of sugarcane and less bargaining power of
farmers. However, any further allowance of export could result in
higher domestic prices. This would improve gross margins further.
ƒ Export of 1.5 MT allowed
Government has allowed Indian mills to export 1.0 MT of sugar before
March 2011 under advance license scheme (ALS) and 0.5 MT of
exports under open general licence (OGL). Under OGL, government
has allowed 18,812 tonnes for Bajaj Hindustan, 14,436 tonnes for
Balrampur Chini and 5,000 tonnes for Renuka Sugar. We believe the
government can further allow 1-1.5 MT of export under the open
general licence. This could lead to a further spurt in domestic prices
Bajaj
Hindustan
We expect the company to sell ~2.6 lakh tonnes of sugar in Q1SY11 with average
realisation of | 30 per kg. We expect the company to report earnings of | 33.1 crore
compared to loss of | 60.9 crore in Q4SY11 as Implicit sugarcane cost has come down to
| 21-22 per kg
Balrampur
Chini
The company will sell 1.4 lakh tonnes of sugar with average realisation of | 30.5 per kg.
With lower Implicit sugarcane cost at | 21-22 per kg, gross margin for the company
would improve considerably. We expect the company to post earnings of | 28.6 crore
Dhampur
Sugar
We expect the company to sell 1.05 lakh tonnes of sugar with average realisation of | 30
per kg. With the rise in sugar prices and increase in power tariff of | 4 per units, EBITDA
margins for the company will improve to 14.2% from operating loss in Q4SY10
Shree renuka
sugars
We expect SRS to sell 2.25 lakh tonnes of sugar with average realisation of | 30.5 per kg
from Indian operations and volume of ~1.9 lakh tonnes from Brazilian operations. With
global sugar prices soaring to 30 cents/lb and reduction in implicit sugarcane cost in India
to | 22 per kg, margins will improve at 25.5%
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