| Rising commodity price, uncertainties over Brazilian shipments boost sentiment. |
Stocks of sugar producers, one of the sectors to underperform the markets by a wide margin over the past year, are showing signs of returning investor interest over the past month.
Stocks such as Balrampur Chini Mills, Shree Renuka Sugars, EID Parry and Upper Ganges Sugars have managed gains of 10-30 per cent in the past month.
What started out as a rush to mark up underperforming sectors has, in the case of sugar, been followed by an actual improvement in sector fundamentals in recent times.
Global price surge
Three key factors have lent support to the re-rating of sugar stocks in this period. One, global sugar (raw) prices, after plunging to a low of about 15 cents/pound in May have since rebounded sharply to over 24 cents/pound this week.
Rising uncertainties about the shape of the Brazilian shipments due to weather problems, tightness in most other global markets and now, worries about lower sugarcane yields in key growing areas in India, have led to predictions that global sugar prices will remain firm until the middle of 2011, when the market will enter a surplus season.
In the interim, higher global sugar prices may help lift realisations for players such as Shree Renuka Sugars who have substantial global market exposure.
If prices sustain, this will brighten export prospects for Indian sugar producers who are likely to process a much larger crop this season.
Two, in the domestic market, a deficient monsoon has triggered worries about the sugarcane yield in key growing areas such as parts of Uttar Pradesh and Bihar.
This creates uncertainties about how the current year's sugar crop will shape up. Initial estimates suggest that despite a sharp rebound in cane acreage, sugar production in the season commencing in October 2010 may be about 240 lakh tonnes.
Given the 10 lakh tonne-export obligation that companies already carry this output may leave a very small end-of-season stock, after meeting the current year's demand.
Though the initial output estimates are certain to undergo big changes as the season progresses, the current scenario does lend support to the domestic sugar price outlook and therefore, realisations. Three, with sugar output set for a recovery this year, players are optimistic about a relaxation in the Government's levy obligation for sugar companies, which is currently at 20 per cent. Any reduction in levy requirement will lead to producers reaping much better realisations on that portion of output released from the levy quota.
Cane price risks
While the above factors do support an improving outlook for sugar over the next year or so, one key factor still remains mired in uncertainty — cane pricing.
With open market sugar prices hovering well below last year's levels, and cane acreage showing a sharp improvement, producers are hoping that procurement prices for cane will moderate substantially compared with the previous season. Failing this, profitability for producers will remain under considerable pressure despite realisations, both at the domestic and global levels, looking up from their lows.
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