IGI Logo

All is well; Maintain our positive bias

Sugar season in India (started in Oct’21) is progressing reasonably well with cumulative production at 11.6mnt, +4% YoY while domestic sugar prices have remained reasonably strong (+4% YoY) and so are the global prices (between US$0.18-0.20 per pound for raw sugar). Indian sugar mills have contracted for over 3.8mnt of exports, even without any subsidy assistance from the government. WTO Panel published a ruling which said country’s domestic support measures for sugar/sugarcane are inconsistent with global trade norms. India has appealed against this ruling. Having said that, we believe this ruling has no consequence for India in near term (given robust global prices and adequately reflected in contracted quantity without subsidy) nor in long term (given significant diversion of sugar surplus for ethanol supplies to OMCs). We maintain our positive view on sugar sector given favorable policy framework for over next 2-3 years (till adequate distillery capacities get set up) and most efficient companies will enjoy significant profitability/cash flows in the meantime. Maintain BUY on Balrampur Chini and EID Parry.

* Sugar production at 11.6mnt, +4% YoY till 31st Dec’21: Sugar production in India touched 11.6mnt till 31st Dec’21, as per ISMA’s press release. While Maharashtra produced 4.6mnt (+15% YoY; early start of the season), UP produced 3.1mnt, -22% YoY given the delayed start of the season and higher diversion of sugar for ethanol production. ISMA had, in its initial estimates (Oct’21) has pegged country’s production at 30.5mnt (net of 3.4mnt on diversion for ethanol production vs 2.1mnt diversion in SS21) vs its initial estimate of 31mnt given lower yield/recovery rates in UP due to unseasonal rainfall in the eastern parts of the state.

* Domestic and global sugar prices holding up reasonably well: Domestic sugar prices (Delhi M-30) have seen modest correction from INR38.4/kg (in Oct’21) to INR 36.5/kg now on seasonality (typically soften during production season of Nov-Mar) but have remained range-bound between INR36-38/kg since the season began and are higher YoY (+4% to 10% YoY since 1st Oct’21). Global prices too have remained in US$0.18-0.20 per pound in past 2 months which have helped Indian sugar mills in export contracts (India has contracted over 3.8mnt of exports in current season without any subsidy assistance from the government).

* Sugarcane prices are reasonably under control: While Fair and Remunerative Price (FRP) was raised by INR50/t by Government of India, UP Government raised State Advised Price (SAP) by INR250/t to INR 3400/t (for general variety). We note that the difference between SAP and FRP is about INR 260/t in SY22 (average of INR 240/t in SS18-SS22 vs INR 640/t in SS13-17 period). We have not seen any significant protests by farmers/millers against this SAP price hike. Mills have paid over 75% of cane price dues during the current season.

* Ethanol- On the right track: Indian government continues to push aggressive Ethanol Blending Program (EBP) as reflected in a) 3-5% hike in ethanol prices YoY, b) continued assistance on capacity expansion and c) robust demand from OMCs (flated tenders for 5.69bn litres for 10% blending). OMCs have already contracted for 3.69bn litres of ethanol for current marketing year (Dec-Nov) and another 0.94bn litres are to be contracted in next few weeks. This compared again 3.12bn litres supplied during last year (Dec’20-Nov’21).

* Ethanol from BIOSYRUP® : Praj Industries, in an announcement (link) declared that it has developed a patented technology to process cane juice into conditioned BIOSYRUP® that has storability of upto 12 months (vs 24 hours for sugarcane juice at present). According to management, this will come at reasonably low capital cost (INR3-4cr per 1000TCD) and operating cost (INR1-1.5/ltr of ethanol). When implemented, this can help improve capacity utilisation for distilleries, particularly in western and southern India and more sugar mills which have significant surplus capacity (e.g. Shree Renuka Sugars) and are able to operate for less than 200 days given raw material availability challenges.

* Recommendation: We continue to remain bullish sugar sector (especially efficient companies) as government policies (sugarcane price/MSP/buffer stock/export subsidies/ethanol prices) would ensure survival of the weakest. Hence, well-managed sugar companies could generate enormous earnings/cash flows in the process. We believe ethanol prices are currently significantly above petrol and alcohol import parity prices as the government is aiming at twin objectives: a) surplus sugar being diverted to ethanol (reduced subsidy burden), and b) a reduction in carbon emissions and dependence on crude imports. We maintain BUY rating on Balrampur Chini (CMP-INR 374; Sep’22TP- INR 410) and EID Parry (CMP-INR 455; Sep’22TP- INR 490).

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer