| Quick Comment: Downside risk to our estimates. While sugar stocks have underperformed the market by over 20% in the past month, we believe there is further downside from current levels. A combination of higherthan- expected production in F2010, an ongoing slide in domestic and international sugar prices, potential large sugarcane production in F2011, and consensus downgrades will likely drive stock underperformance, in our view.
Our earnings estimates already appear aggressive given the sharp fall in domestic sugar prices over the past week. We remain sellers at current prices.
Domestic sugar prices continue to slide: According to the National Commodities and Derivatives Exchange Limited (NCDEX), spot sugar price (S Grade) in the Kolkata market as of March 22, 2010 was ~Rs3,000 per quintal (inclusive of excise duty), which on our estimate, is close to the breakeven price for millers with average sugarcane cost of ~Rs250 per quintal. Interestingly, even as the reported price is ~Rs3,000 per quintal,channel checks suggest that sugar is trading at Rs2,900 per quintal with millers aggressively offloading imported sugar. Surprisingly even potential inventory pipeline re-stocking is unable to support domestic sugar prices at these levels.
Investors may look to play the potential bounce; risk/reward may not be favorable: While many investors hold a cautious longer-term view, they also believe that sugar stocks are oversold and they are positioned to play a potential short-term bounce in sugarstock prices. While the near-term demand supply situation remains fragile, an ongoing sharp fall in domestic sugar prices, coupled with higher-than expected domestic sugar production may lead to panic selling of sugar. It may be difficult for stocks to bounce without the support of higher sugar prices, in our view.
We recommend that investors refrain from taking long-term positions in sugar stocks at current levels. 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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