With production surging, fortunes of the sugar industry have changed dramatically. Sugar companies, which were expected to make bumper profits because of soaring sugar prices — Rs 41.15 per kg in January 2010 — are in news for different reasons. Ever since scaling a peak in January, prices have corrected by almost 33.5 per cent to Rs 28 per kg. This is also one of the reasons why most sugar companies have seen a sharp decline in their share prices. Downturn in sugar cycle
"There are indications that in 2010-11, the deficit phase is coming to an end. In some key producing countries, sugar output is likely to expand. The first obvious candidate is India. The notorious production cycle has entered the upswing phase, and next season's output is likely to grow further. The government expects next season's output to improve massively to 22-23 million tonnes white sugar, as against 18.5-19.0 million tonnes in 2009-10," says Sergey Gudoshnikov, senior economist at ISO.
In fact, as against the government's projections, many industry analysts estimate that white sugar production will be as high as 26 million tonnes. Sergey says, "If production gains allow India to harvest a crop approximately corresponding to the mid-level of the suggested range, that is, to about 24 million tonnes (white sugar), it will bring roughly an additional six million tonnes, raw value, to global supply." Apart from India, surplus production is also expected in other key producing nations like Brazil, China and Mexico. Impact
Now, profits will take a hit due to lower prices and impact of high-cost inventories. According to analysts, companies are holding inventories at about Rs 25-27 per kg. Hence, stabilisation of sugar prices at current levels is crucial. Otherwise, the companies will suffer losses, which will lead to higher arrears, impacting the farmers. The road ahead
Following industry expectations that the government may impose import duty on sugar, share prices of sugar companies have recovered some lost ground over the last fortnight. Meanwhile, analysts believe that after the significant correction seen recently, sugar prices should stabilise at current levels.Nevertheless, for the second half of 2009-10, most sugar companies will report lower profits or even losses. The profitability of the companies is expected to improve only in the second half of 2010-11, when prices are expected to be stable and cane prices low. Among stocks that analysts prefer are Shree Renuka Sugars (due to better profitability, diversified business and pending re-negotiation of its Brazilian acquisition) and Balrampur Chini Mills (due to relatively lower debt and increasing revenue contribution from power and ethanol). 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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