Indian sugar sector is facing a bitter pill putting pressure on sugar producing companies, evident from their recent quarterly numbers. There are variety of reasons for this. In India, sugar is an essential commodity, having 4% weightage in the WPI Index. The projected supply-demand mismatch is expected to be 5 million tons, production @ 25 million tons, and demand being 20 million tons. Also, sugar prices globally are trading around 18 month lows, though they recovered slightly due to demand from Russia and low production in Mexico.
In India, all sugar producers have to sell 10% of their total produce to Government at ‘levy price’, currently at Rs. 13.5/Kg, while realisations for north Indian mills are Rs. 14.5/Kg, and in south its Rs. 14/Kg. The Govt. recently approved a package of Rs. 850 crores as incentive to sugar mills, which may help temporarily steady the prices but due to falling international prices, it will fail to make much impact.
With the successful installation of Government in Uttar Pradesh, the most populous state of India, the state’s biggest industry, the Sugar Industry, was firmly pinning hopes from some positive signals from the Govt. But, with the sugar season coming to end in May, any new sop is hardly expected, and moreover unlike Maharashtra, where sugar mills are owned by co-operatives, UP sugar mills are private so the Government will not be willing to incur the additional burden of sops for itself.
Due to the hardening regulations and prices, the sugar stocks recently traded at their 52 week lows, though they recovered off late from that levels slightly. But in the near term, things doesn’t seem bright, due to projected excess supply and non-clarity from Government regarding Ethanol blending in petrol (which could be a huge revenue generation for sugar mills and also bring down the crude import figures). But, in long term, things could improve for sugar mills with the clarity on issues faced by the sector, and favourable demand-supply projection.
For current investment, Shree Renuka Sugars is the best bet among the sugar companies as it has a diversified business model and locational advantage arising from presence in south India. Other north based large players such as Bajaj Hindusthan and Balrampur Chini would continue to face pressure in the market.
On May 22, 2007, the Central Govt. cancelled 98% of Industrial Entrepreneur Memorandums, thus now new players can enter into the existing markets and use the cane area, and the expansion plans of existing sugar companies stand cancelled.
Find this article at: http://www.labnol.org/india/corporate/sugar-sector-regain-sweetness/64/
