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RENDRA NATHAN

Sugar has always been a cyclical com-modity. But this year the price cycleseems to have shortenedconsiderably. It was just at the

inning of this calendar year that investorsre dumping sugar stocks becauseernational prices had hit a seven-month

w. But within a short span, internationalgar prices have bounced back to hit a newyear high in November. Even after theent correction, international sugar prices

ntinue to be close to the 30-year highs.However, that has not translated into gainsinvestors as the domestic sugar prices

ve not participated in the latest internation-ally started from May 2010. The gapween international prices and domesticces is widening each day (see graph). Butt may change soon because the agriculturenister Sharad Pawar recently announcedgovernment's plan to relax the export ban.

hile the government has approved apment of 5 lakh tonne sugar (this is overd above the pending re-export obligation of

und 1 million metric ton), the marketrticipants are expecting more action in theming months.ernational prices: It is not just theakening US dollar triggered by the secondantitative easing programme by the USderal Reserve (that promises to pump in anditional $600 billion over a period of eightnths) that is driving international sugarces. Factors like drought in Brazil (a major

gar producer) coupled with excess rain inuntries like Pakistan have significantlyuced international production estimates.

e global demand-supply situation hasanged from an estimated surplus of 5lion metric tons to around 1.5-2 mmt.mestic prices: Since the production of

gar this season is expected to be more than

mestic demand - India's sugar productionSY11 (sugar year which is from October to

September) is expected to be around 26 mmtagainst a consumption of around 23 mmt - do-mestic sugar prices may not shoot up immedi-ately. Domestic prices may not go upimmediately, at least for the next 3-4 months,says Sageraj Bariya of Angel Broking. This isbecause the food inflation is still well abovethe government's comfort zone and theremay be stringent action (like withdrawing theexport permits) if this aggravates thedomestic situation.Increase in levy sugar price: Sugar companiesare also going to benefit from the increase inlevy sugar prices for this season. The levy sug-ar price has gone up from `17.5 per kg to `18.5per kg, an increase of 5%.Raw material costs: The Uttar Pradesh

government has decided to pampersugarcane farmers by increasing the stateadministered prices (SAP) for sugar cane forSY 2010-11 by `40 a quintal. With this, the SAPin UP has reached an average `205 a quintal,well above the general expectation of`190 aquintal. However, even at `205 a quintal, theycan bring down their cost of production to`25-26 a kg, leaving a decent profit margin of

`3-4 a kg (considering the Mumbai sugar priceof 29).Ethanol looks bright:The government hasincreased the ethanol procurement prices forethanol blending programme (EBP) of oilmarketing companies (OMCs) from `21.50 alitre to `27. More importantly, this clarity hasresulted in streamlining the EBP itself. Oilcompanies who were not complying with the5% mandatory blending earlier have starteddoing it now, says Sanjay Manyal of ICICISecurities. The higher quantity of cane crush-ing this year will improve the availability ofmolasses thereby helping the sugarcompanies post decent growth from their dis-tillery divisions. The drought in Brazil has alsoimpacted ethanol prices in a big way.Stock prices have started reacting: Though

domestic sugar prices did not make any majorjump due to the export announcement, stock

market has realised its potential. Thatexplains why the Economic Times SugarIndex turned out to be the best performingsector with a gain of 12.2% in last week. Andnow comes the most difficult questionhaveall the good news mentioned above alreadyfactored in the price? We don't think so,because the gaps between domestic and inter-

national sugar prices are still wide enough(see graph). Shree Renuka Sugars remains the

best pick, mostly because it will benits Brazilian acquisitions of VDI andWe are also positive on Balrampurthe decline in sugarcane cost and ripower tariffs would help the compaits earnings in the black, says Many

International sugarprices vs domesticprices Why sugar is

getting hotte International sugar prices

30-year high

International ethanol pricDomestic prices remain s

due to a partial export ba

India is expected to have asugar production in SY 10

Stock prices have gone upexport relaxation news, b

scope for further apprecia

Analysts we spoke to are most bullish on Shree Renuka Sugars and Balrampur

(A higher rating means more analysts are bullish on the stock)

Valuation parameters of large sugar stock

Company Name P/E Market 6-month Analyst

ratio cap returns (%) rating

Shree Renuka Sugars 8.68 6,020 19.55 4.11

E I D-Parry (India) 10.91 4,315 33.44 5

Triveni Engineering & Indus 39.70 2,764 9.61 4

Bajaj Hindusthan 10.72 2,114 -4.70 1.5

Balrampur Chini Mills 9.75 2,071 -0.56 3.52

Bannari Amman Sugars 6.96 834 -0.55 NA

Please send your feedback toetwealth@indiatimes.com

omestic sugar stocks did not rise even whenternational prices touched a 30-year high. Butere are enough factors to be positive both in

e short and long term.

Sweetopportunityn sugar stocks

PICK OF THE WEEK

StockPThe Economic Times Wealth, December 20, 20100

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