**[investwise]** Morgan Stanley: Downgrading India Sugar; Surplus Imminent

 

Investment Conclusion: While sugar stocks have underperformed the markets by over 20% over the past three months, we see further downside from current levels. A combination of higher-than-expected production in F2010, a sharp decline in international sugar prices, potential large sugarcane production in F2011, and consensus downgrades are likely to drive stock underperformance, in our view. Our estimates may be aggressive if international prices continue to trend lower. We downgrade BRCM and SHRS to UW.   What's new: The Indian Sugar Mills Association now estimates F2010 domestic sugar production at 16.8mn tons, up from earlier estimate of 15mn tons. While this does not materially alter our near-term thesis of tight domestic demand supply balance, it does affect our F2010 sugar production estimates.   On a higher base, a 40% production increase means sugar production will likely equal domestic sugar consumption in F2011, effectively capping domestic prices, in our view.   Where we differ: 1) Lack of incremental triggers and the deep cyclical nature of the commodity may result in the stocks trading below intrinsic value. 2) Certain millers have imported sugar at relatively high prices.   Continuing sharp fall in domestic sugar prices combined with higher-than-expected domestic sugar production may lead to panic selling of sugar. 3) High cane prices in F2010 coupled with good weather may induce a sharper-than-expected sugarcane production response.   Weather – Biggest risk to our investment thesis: Our channel checks suggest that ground water levels in certain parts of India are relatively low. Poor weather conditions in the key cane growing areas of India may exacerbate the fragile sugar balance, sparking a fresh rally in sugar stocks. Investors with a large risk appetite might buy sugar as a hedge against poor monsoon. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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