The government plans to export 2 MT of raw sugar to China next year. This export push initiative will enable the country to grab market share from more importing countries such as Bangladesh, which needs 2.5-3 MT per annum of raw sugar
India is the second largest producer of sugar, with an annual production of 32.5 million tonnes in the marketing year (MY) 2017-18 (October-September).
The industry supports about 5 crore sugarcane farmers across India and therefore carries high political importance as well.
As of MY 2016-17, there are 493 factories in operation with a total sugar production capacity of 34 MT. The majority of production is from the states of Uttar Pradesh, Maharashtra and Karnataka.
Of the total capacity in place (production and opening balance), nearly 89 percent is utilised to meet the domestic demand. The per capita consumption is 18.8 kg compared with the global average of 23 kg.
Oversupply and lack of alignment key focus areas:
Despite a strong background, excess supply of sugar in the market has kept the sector under pressure and weakened its financial profile. The surplus has lowered the average selling price, and as a result industry participants continue to delay selling their inventories.
Moreover, the cane price, which is mandated by the government, made a big leap and has grown at a CAGR of 10 percent during the period MY 2010-11 to MY 2016-17.
The usually volatile sugar price, on the other hand, grew at just 3 percent during the period, putting profitability under pressure. For MY 2017-18, the government further increased the cane price to Rs 255.
Rising cane price increases the cost of production, but sugar prices are not keeping pace. The growing cost of production for the industry made a huge impact on EBITDA margins and profitability. To calculate the margin and profitability of the industry, the top three firms have been taken into consideration.
Government intervention to improve financial health:
Recently, the Indian government introduced a few schemes to liquidate surplus stocks and bail out the cash-starved sugar industry.
The government made it mandatory for sugar mills to export 5 MT in MY 2018-19. It will be offering a transport subsidy of Rs 1,000/ton to the mills located within 100 km from ports, Rs 2,500/ton for mills beyond 100 km from the port in coastal states, and Rs 3,000/ton for mills located in non-coastal states.
Apart from this, the government has doubled the import duty on sugar to 100 percent and scrapped the 20 percent export duty. It announced a financial package which includes production assistance of Rs 13.88/quintal of cane crushed for MY 2018-19 from Rs 5.50/quintal this year to help sugar mills clear their dues to sugarcane farmers.
In May, the government asked oil marketers to target 10 percent blending of ethanol with petrol as part of a national policy for biofuels.
In September, it hiked the prices of ethanol by about 25 percent, giving much-needed impetus to the industry. Sugarcane ethanol is an alcohol-based fuel produced by the fermentation of sugarcane juice and molasses.
In addition to the above-mentioned reforms, the government plans to export 2 MT of raw sugar to China next year. This export push initiative will enable the country to grab market share from more importing countries such as Bangladesh, which needs 2.5-3 MT per annum of raw sugar (currently importing from Brazil). This will also help India narrow its trade deficit.
Stocks of interest:
Balrampur Chini Mills
The stock exhibits strong technical with an Up/Down volume of 1.8, A/D Rating of B+, and improving RS line with an RS Rating of 93.
The recent reforms brought much-needed cheer for the investor and as a result, it spiked more than 90 percent from its 52-week low of 58.7 (as of November 14).
On October 31, the company reported its Q2 results. While its revenue from operation fell 18 percent y/y, both PBT and PAT grew 5 percent and 10 percent, respectively. Diluted EPS grew 13 percent to Rs 3.98.
Andhra Sugars
The stock hit a new high of Rs 484.8 on September 17. However, it failed to sustain that level and breached its key support level at 50 and 200-DMA in subsequent trading sessions.
After bottoming at Rs 301.6, the stock bounced back strongly and retook its 50-DMA on October 30. It is currently trading 8 percent below its 200-DMA. The EPS rank of 71, Up/Down volume of 21, and A/D Rating of A- display strong technical strength.
On November 3, the Company reported its Q2 results. Its revenue from operations fell 18 percent to Rs 1,015 crore. However, with operating leverage benefit kicking in, the PAT and diluted EPS grew 23 percent each.
