Sugar stocks have been in the limelight for past one week or so and have risen by about 20%, though they are soft today. So what has really changed for the sugar sector and can this rally get sustained over the next 8 10 months? We have tried to analyse the sector and its likely impact on the sugar stock prices.
In last 15 days, sugar prices have gone up by about Rs.2 to Rs.2.50 per kg with ex-mill price in U.P. at Rs.18 per kg while at Rs.17 to Rs.17.30 per kg. in Maharashtra and Southern states respectively. If we add excise of 85 paise per kg., transportation of 50 paise per kg. and packing forwarding and dealers commission of Re.1 per kg., the retail price works out at Rs.20 per kg., which is the present price against Rs.17.50 to Rs.18 per kg. ruling till last month.
Sugar Mills across the country have realized an average price between Rs.15 to Rs.16 per kg. during June quarter, for which most sugar companies have announced its financial results. The realization in the June 08 quarter was higher by about a rupee per kg. sequentially while it was higher by about Rs.2 to Rs.2.50 per kg. over the corresponding quarter of the previous year. That is the reason that against the highest losses having posted by the sugar mills in any quarter, was June 07 and financial performance of June 08 quarter was much better in the recent past, since the export of sugar was banned by the government.
Balrampur Chini had a loss before tax of Rs.56 crores for June 07 quarter which was profit before tax at Rs.26 crores for June 08 quarter.
Traditionally, sugar mills run for almost 180 days in a year with season starting in mid-October and closing by end of April. So, sugar produced in this six months, get sold over a year by the mills. With few mills in South, no mills are operations in any part of the country and hence only inventory held by them is getting sold, on which the mills are enjoying better realization.
Also, July October is a festive season during, which, sugar consumption goes up and any short release of sugar leads to higher price. Infact, international prices of white sugar have been ruling at or above $ 400 per tonne since June 08. With rupee weakening in last three months from Rs.40 a dollar to Rs.43 a dollar, the effective cost was working out at Rs.17 to Rs.17.20 per kg., while domestic price was ruling at Rs.16 per kg. during June 08. So even that correction in domestic sugar prices have taken place and now they are higher than the international prices, thus dissuading the mills to export.
The government, last year had created a buffer stock of 2 million tonnes and thereafter of 3 million tonnes, for a year. Of this, 2 million tonne were released by the government which were directed for release by 31st August 08 to the mills. Of remaining 3 million tonnes, 25% stock needs to be released by the mills by 30th September, while for remaining 75% stock, release dates were not given by the government to the mills. Due to liquidity pressure faced by the mills, many of them, especially of U.P., have released first lot of buffer, much ahead of 31st August 08. Dhampur sugar is one such mill.
The government has recently hinted to control sugar price, as inflation control is on top of the agenda of the government. Any sharp rise in prices of sugar, onion and potatoes have seen government loosing elections. With nine states going for elections by November 08, and with General Elections, due latest by April, 09, the government would not take chance on sugar price rise. Also, beyond a point, commodity price cannot rise, and as it has reached at par to international price. Further rise in domestic price is not expected and likely.
In this background, though we have a sweetner in the form of rise in commodity prices, but there are the following concerns which would outweigh its gains. They are :--
1) Government holding buffer of 22.50 lakh tonnes (out of total buffer of 50 lakh tonnes) would use it by releasing at appropriate time, to cool off the prices. The release may happen by 31st October, before starting next season, which can either cool prices by Re.1 per kg. or atleast may not allow it to rise further.
2) Due to general elections latest by April 09, and nine state elections likely to happen on or before December 08, the government would be keen to control control sugar price, which is sensitive and can upset any election results. Onion, potato and sugar are the three essential commodities having turned the results in the past.
3) Sugar has weightage of 3.25% in Wholesale Price Index and an increase of 25% in domestic price of sugar can raise inflation.
4) The rise in sugar price by Rs.2 to Rs.2.50 would not benefit much to the sugar mills, as they are holding inventory for the next 3 4 months only as they are close to start of next season. So, rise in sugar price is advantageous for the traders and commodity players rather than to producers and farmers..
5) Season 08-09 is likely to see a production of 230 lakh tonnes, slightly less than 07 08 production of 265 lakh tonnes. As per the latest government data, sugarcane has been sown in around 43.9 million hectare till 31t July, down from 53 million hectare last year. Last year, due to higher cane output, large quantity of it was diverted to gur and khandasar maker, which may not happen this time. So, earlier estimation of industry predicting production to be around 190 lakh to 200 lakh tonne in 08 09 would get surpassed.
6) Due to general elections in April 09, it is likely that U.P. government would have pro-farmer approach which may compel them to announce higher SAP for sugarcane which was at Rs.125 per quintal for season 07 08. For season 08 09, this is likely to get announced at Rs.140 per quintal. This will increase the cost of production of sugar for U. P. Mills for the next year.
7) In a recent judgement, Lucknow bench of Allahabad High Court has upheld the SAP for 07 08 at Rs.125 per quintal. Mills in U.P. have preferred an SLP in Supreme Court and upholding the judgement of High Court may lead to an extra burden of Rs.950 crores for private sugar mills in U.P. which would further worsen their financial health, which is already deteriorating.
8) Government would be keen to see that retail price of sugar does not cross beyond Rs.20 and hence further scope of price rise has been arrested.
9) Due to domestic price now ruling higher than international price, would discourage export of sugar from the country. This will result in higher closing stock with us as on 30-09-08, which is likely to be about 120 lakh tonnes.
10) Due to fall in crude price from $ 148 to $ 118 barrel, even price of alcohol/ethanol have started softening which had peaked to $ 625 per MT, resulting in a per litre realization of about Rs.26 per litre. Due to this, the profitability of Distillery Segment of sugar mills would get mildly impacted.
11) Season 08 09 starting from end October, would have an opening stock of 12 million tonnes and estimating production of 22 million tonne, would have an available quantity of 34 million tonnes against estimated consumption of 21 million tonnes. Even if an export of 3 million tonne is assumed, we would still be left with a surplus of about 10 million tonnes, throughout the year, which would also get carried over for season 09 10. This is likely to keep the sugar price under check throughout season 08 09.
12) Many U.P. sugar mills have to book the past cane arrears, which were though paid, but not booked, would impact the financial results of the coming quarters. For example Bajaj Hindustan has to book past cane arrears of close to Rs.500 crores. Apart from this, difference of cane arrears for 07 08 season would get booked by U.P. Sugar Mills of about Rs.950 crores. So all this provision would optically present negative financial results in the time to come.
With this, it is evident that industry is grappled with more concerns than the limited benefit of price rise of Rs.2 per kg., which we have seen in the recent past.
By SP Tulsian
chintan
In last 15 days, sugar prices have gone up by about Rs.2 to Rs.2.50 per kg with ex-mill price in U.P. at Rs.18 per kg while at Rs.17 to Rs.17.30 per kg. in Maharashtra and Southern states respectively. If we add excise of 85 paise per kg., transportation of 50 paise per kg. and packing forwarding and dealers commission of Re.1 per kg., the retail price works out at Rs.20 per kg., which is the present price against Rs.17.50 to Rs.18 per kg. ruling till last month.
Sugar Mills across the country have realized an average price between Rs.15 to Rs.16 per kg. during June quarter, for which most sugar companies have announced its financial results. The realization in the June 08 quarter was higher by about a rupee per kg. sequentially while it was higher by about Rs.2 to Rs.2.50 per kg. over the corresponding quarter of the previous year. That is the reason that against the highest losses having posted by the sugar mills in any quarter, was June 07 and financial performance of June 08 quarter was much better in the recent past, since the export of sugar was banned by the government.
Balrampur Chini had a loss before tax of Rs.56 crores for June 07 quarter which was profit before tax at Rs.26 crores for June 08 quarter.
Traditionally, sugar mills run for almost 180 days in a year with season starting in mid-October and closing by end of April. So, sugar produced in this six months, get sold over a year by the mills. With few mills in South, no mills are operations in any part of the country and hence only inventory held by them is getting sold, on which the mills are enjoying better realization.
Also, July October is a festive season during, which, sugar consumption goes up and any short release of sugar leads to higher price. Infact, international prices of white sugar have been ruling at or above $ 400 per tonne since June 08. With rupee weakening in last three months from Rs.40 a dollar to Rs.43 a dollar, the effective cost was working out at Rs.17 to Rs.17.20 per kg., while domestic price was ruling at Rs.16 per kg. during June 08. So even that correction in domestic sugar prices have taken place and now they are higher than the international prices, thus dissuading the mills to export.
The government, last year had created a buffer stock of 2 million tonnes and thereafter of 3 million tonnes, for a year. Of this, 2 million tonne were released by the government which were directed for release by 31st August 08 to the mills. Of remaining 3 million tonnes, 25% stock needs to be released by the mills by 30th September, while for remaining 75% stock, release dates were not given by the government to the mills. Due to liquidity pressure faced by the mills, many of them, especially of U.P., have released first lot of buffer, much ahead of 31st August 08. Dhampur sugar is one such mill.
The government has recently hinted to control sugar price, as inflation control is on top of the agenda of the government. Any sharp rise in prices of sugar, onion and potatoes have seen government loosing elections. With nine states going for elections by November 08, and with General Elections, due latest by April, 09, the government would not take chance on sugar price rise. Also, beyond a point, commodity price cannot rise, and as it has reached at par to international price. Further rise in domestic price is not expected and likely.
In this background, though we have a sweetner in the form of rise in commodity prices, but there are the following concerns which would outweigh its gains. They are :--
1) Government holding buffer of 22.50 lakh tonnes (out of total buffer of 50 lakh tonnes) would use it by releasing at appropriate time, to cool off the prices. The release may happen by 31st October, before starting next season, which can either cool prices by Re.1 per kg. or atleast may not allow it to rise further.
2) Due to general elections latest by April 09, and nine state elections likely to happen on or before December 08, the government would be keen to control control sugar price, which is sensitive and can upset any election results. Onion, potato and sugar are the three essential commodities having turned the results in the past.
3) Sugar has weightage of 3.25% in Wholesale Price Index and an increase of 25% in domestic price of sugar can raise inflation.
4) The rise in sugar price by Rs.2 to Rs.2.50 would not benefit much to the sugar mills, as they are holding inventory for the next 3 4 months only as they are close to start of next season. So, rise in sugar price is advantageous for the traders and commodity players rather than to producers and farmers..
5) Season 08-09 is likely to see a production of 230 lakh tonnes, slightly less than 07 08 production of 265 lakh tonnes. As per the latest government data, sugarcane has been sown in around 43.9 million hectare till 31t July, down from 53 million hectare last year. Last year, due to higher cane output, large quantity of it was diverted to gur and khandasar maker, which may not happen this time. So, earlier estimation of industry predicting production to be around 190 lakh to 200 lakh tonne in 08 09 would get surpassed.
6) Due to general elections in April 09, it is likely that U.P. government would have pro-farmer approach which may compel them to announce higher SAP for sugarcane which was at Rs.125 per quintal for season 07 08. For season 08 09, this is likely to get announced at Rs.140 per quintal. This will increase the cost of production of sugar for U. P. Mills for the next year.
7) In a recent judgement, Lucknow bench of Allahabad High Court has upheld the SAP for 07 08 at Rs.125 per quintal. Mills in U.P. have preferred an SLP in Supreme Court and upholding the judgement of High Court may lead to an extra burden of Rs.950 crores for private sugar mills in U.P. which would further worsen their financial health, which is already deteriorating.
8) Government would be keen to see that retail price of sugar does not cross beyond Rs.20 and hence further scope of price rise has been arrested.
9) Due to domestic price now ruling higher than international price, would discourage export of sugar from the country. This will result in higher closing stock with us as on 30-09-08, which is likely to be about 120 lakh tonnes.
10) Due to fall in crude price from $ 148 to $ 118 barrel, even price of alcohol/ethanol have started softening which had peaked to $ 625 per MT, resulting in a per litre realization of about Rs.26 per litre. Due to this, the profitability of Distillery Segment of sugar mills would get mildly impacted.
11) Season 08 09 starting from end October, would have an opening stock of 12 million tonnes and estimating production of 22 million tonne, would have an available quantity of 34 million tonnes against estimated consumption of 21 million tonnes. Even if an export of 3 million tonne is assumed, we would still be left with a surplus of about 10 million tonnes, throughout the year, which would also get carried over for season 09 10. This is likely to keep the sugar price under check throughout season 08 09.
12) Many U.P. sugar mills have to book the past cane arrears, which were though paid, but not booked, would impact the financial results of the coming quarters. For example Bajaj Hindustan has to book past cane arrears of close to Rs.500 crores. Apart from this, difference of cane arrears for 07 08 season would get booked by U.P. Sugar Mills of about Rs.950 crores. So all this provision would optically present negative financial results in the time to come.
With this, it is evident that industry is grappled with more concerns than the limited benefit of price rise of Rs.2 per kg., which we have seen in the recent past.
By SP Tulsian
chintan
