01-01-1970 12:00 AM | Source: JM Financial Institutional Securities Ltd
Sugar Sector Update : government regulating sugar exports, especially given concerns over global commodity - JM Financial Institutional Securities
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All is well 2.0- Global outlook improving; India outlook firm

Since our last note (All is Well-Jan’22), not much has changed for the domestic industry, in our view, except a) momentary impact of lower yield/recovery rates in Central/East UP (relevant for BRCM), some of which is expected to reverse in the coming SS23 crushing season, and b) government regulating sugar exports, especially given concerns over global commodity (especially agri) inflation. While we do note that a major characteristic of the domestic sugar industry is significant regulation, we continue to believe that the government’s aim is to allow export of excess sugar (keeping sufficient inventory for local consumption). This is reflected in a) the recent decision to approve export of 1.2mnt (million tonnes) over and above the already approved 10mnt, due to higher-than-expected domestic sugar production), and b) indication of 6-8mnt in SS23. As a result, domestic sugar prices have been stable in the past 1 year, and prices will remain firm in the next 12-18 months. Ethanol blending momentum remains strong (10% blending in ESY22 and expected to go up to 12% ESY23) and media articles are indicating a possible increase in ethanol price (by upto INR2-3/ltr). The global outlook remains fairly robust; in fact, it could possibly see a boost given newsflow regarding drought in several countries and yield issues in Brazil. We maintain BUY on Balrampur Chini.

* Sugar production (net) in SS22 at 36mnt; early estimates for SS23 at 35.5mnt: As on 15th May’22, India’s sugar production was 34.9mnt (+14% YoY) after diversion of 3.4mnt (million tonnes) for ethanol production. While Maharashtra produced 13.5mnt (+28% YoY), UP produced 10.2mnt, -7% YoY given lower yield/recovery rates due to unseasonal rainfall in eastern parts of the state and higher diversion of sugar for ethanol production. ISMA, in its preliminary estimates for SS23, has pegged sugar a) production at 35.5mnt, assuming diversion of 4.5mnt for ethanol, b) 8mnt for exports, assuming sugar consumption of 27.5mnt and closing inventory equivalent to c.3 months’ consumption.

* Domestic and global sugar prices steady: Domestic sugar prices (Delhi M-30) have largely been stable ~INR36/kg- INR38/kg since the beginning of the season in Oct’21. Global prices too have remained firm in US$0.17-0.19 per pound in the past 2 months, which has helped Indian sugar mills in export contracts.

* FRP hiked by INR 150/t; SAP seen unchanged (after a sharp hike in SS22): While Government of India (GoI) hiked Fair and Remunerative Price (FRP) by INR150/t for SS23 (c.2.6% effective price hike), the UP government’s State Advised Price (SAP) of INR 3400/t (for general variety) is unchanged, so far. Assuming flat SAP and recent hike in FRP, we note the difference between SAP and FRP has narrowed to INR 160/t in SS23 vs. 250/t in SS22 (average of INR 240/t in SS18-SS22 vs. INR 640/t in SS13-17).

* Ethanol Blending Programme (EBP) stays intact (from 10% to 12% in ESY23): The GoI continues to push EBP, which is reflected in a) robust demand from OMCs (OMCs contracted 4.44bn litres of ethanol for ESY22, of which 3.62bn litres was from the sugar industry), equivalent of 10% EBP, and this is expected to go up to 12% in ESY23, with an estimated demand of c5.45bn litres of ethanol, and b) continued assistance on capacity expansion (distillery capacity at 8.9bn ltr, as per industry sources). Moreover, media articles suggest that ethanol prices (2-5% 3-year CAGR) could be hiked by 4-5% for ESY23, higher than the 2.6% increase in FRP.

* Recommendation: We remain positive on the sugar sector (especially efficient companies) as government policies (sugarcane price/MSP/ethanol prices) would ensure survival of the weakest. While the regulation of sugar exports appear optically negative, we are convinced that it is aimed at a) ensuring adequate stock for local consumption, thus avoiding any undesired rally in domestic price, b) continuity in the ethanol programme (ethanol momentum could get upset in case of a significant rally in sugar prices). We believe trade has taken this regulation change positively as reflected in firm domestic sugar prices since then. We maintain BUY rating on Balrampur Chini (CMP-INR 374; Sep’23TP- INR 470).


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