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Sugar production estimate for the current season (SS23) is seeing a sharp cut – from 35.5 million tonnes (mnt) earlier to c.33mnt now – on account of lower yields and recovery rates across states, particularly Maharashtra and Karnataka (unseasonal rains). Given domestic consumption of c.27.5mnt and exports of 6mnt (government unlikely to allow further exports), we estimate closing inventory to be stable at around 6.5mnt (considering government’s revised estimates of opening inventory in Oct’22). Given reduced exportable surplus from India, global (raw/ refined) sugar prices have rallied 11% in past 10 days (10 years high in USD terms; at all-time high in INR/BRL terms). Domestic prices too have risen about 7-8% in past 10 days and we believe another 5-7% price rise is likely over the next 4-6 months. However, we think an exceptional rally is unlikely given the government’s direct/indirect controls on the sugar sector (release mechanism; regulated exports; ethanol blending policy/pricing). However, the current year’s tightness and murmurs on next year’s crop will keep the sector in focus. We continue to remain positive on the Indian Sugar sector and reiterate our BUY rating on Balrampur Chini with an unchanged Mar’24TP of INR 480.

* Sugar production estimate revised sharply downward: Sugar production in India (till Mar’31) declined 4% YoY to 29.87mnt, as higher acreage was offset by lower yields and recovery rates across India, particularly Maharashtra and Karnataka (unseasonal rains) and Uttar Pradesh (instance of disease in certain pockets), as per industry sources. As on 31st Mar’23, only 194 mills were in operation vs. 366 last year (only 20 mills in Maharashtra vs. 167 last year). While ISMA is yet to revise its 1 st advance estimates (published in Jan’23), the National Federation of Co-operative Sugar Factories now estimates sugar production around 32.5mnt (vs. 35.5mnt ISMA estimate in Jan’23). Given the expectation of an El-Nino-led monsoon deficit, we do not rule out a modest reduction in sugarcane acreage (relevant for SS24) in monsoon-dependent pockets of Maharashtra and Karnataka, resulting in a slight cut in production estimates for SS24.

* Domestic sugar prices rally 7-8% in past 1 week - expect further firm-up: Excluding some weakness seen in April (due to export restrictions announced by the government), ex-mill realisation was steady over the past 14-15 months (ex-mill in UP was INR 35-36/kg for M30 grade). However, domestic sugar prices have firmed up by INR 1.5-2/kg in the past 10 days (current ex-mill in UP is c.INR 37-37.5/kg) as a) sugar production estimates are being pruned, resulting in a tight-demand supply scenario (inventory equivalent to c.2.5months of consumption, as on Sep’23; crushing season typically picks up momentum only in Dec), b) summer season-led demand has started trickling in (i.e., seasonality), and c) there is a significant rally in global prices (white sugar at a multi-decadal high in INR terms), boosting sentiment in the domestic market. We expect domestic sugar prices to move up by another INR 1.0-1.5/kg in the next 4-6 months (till the new sugar season starts by Nov’23). Moreover, monsoon-related news flow too will keep industry on edge.

* Global prices rally to decadal highs: Global raw/refined sugar prices have rallied 11% each in the past 10 days (12%/15% respectively in past 1 month) on the back of global tightness, especially driven by lower exportable surplus from India (India exported 11mnt in SS22/6mnt in SS23 likely; further reduction in SS24). White sugar (INR 55/kg at lifetime high; US$660/tn, a 10-year high) and raw sugar (INR 43/kg at life time high; US$0.2364/pound or US$520/tn, a 10-year high) are expected to remain firm, as per industry sources. This augurs well for domestic prices from a sentiment perspective, in our view, given the government is expected to restrict exports in order to maintain stable inventories.

* Ethanol Blending Program momentum intact: As per our channel checks, the ethanol momentum remains intact, though slight delays have been seen in the past 1 month on account of storage constraints in certain pockets of the country. Having said that, the government is keen on touching 12% EBP level in the current ethanol supply year (DecNov). Of the total required quantity of 6.1bn litres, the government has already  contracted for 5.2bn litres and distilleries have supplied 1.8-1.9bn litres till Mar’23 (c.11.5% level), as per the industry.

* Are we at the cusp of an up-cycle?: Given the cut in sugar production estimates, rallying domestic/global sugar prices, and monsoon-related concerns, we do not rule out the assumption of an ‘up-cycle’ by some industry participants. However, we believe the government has actively managed fundamentals of the industry extremely well in the recent turbulent times (significant exportable surplus in 2018-2022) through various measures such as sugar release mechanism, promotion of ethanol blending programme (diverting excess sugar; ensuring sugarcane farmers paid on time) as well as restricting sugar exports ahead of time. In line with our initial thesis (Apr-21 report-Opportunity in Adversity), the government aims to maintain stability in the sector (weakest sugar mill is able to survive, farmers get paid fully and on time, while consumers don’t feel a significant pinch). This is expected to be the case even in the ensuing supply tightness, in our view. We continue to believe the most efficient mills like Balrampur Chini will reap tremendous profits through intergrated operations in the medium term. We reiterate BUY on Balrampur Chini with an unchanged Mar’24TP of INR 480.

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