September 28, 2015 | PM Securities
Here’s what we think:
After four years of a down spiral, sugar as a commodity seems to have bottomed out globally and this augers well for the Indian sugar industry which was reeling under rising SAP and falling sugar prices.
We expect white Sugar prices to rise moderately in the coming twelve months. This coupled with the benefit of higher realization for ethanol used for blending with petrol and falling interest rates could significantly boost the bottom line of sugar companies and recommend a BUY on the sector
Global Sugar cycle seems to be turning:
Global reduction in sugar production especially in Brazil due to shift to ethanol and in India due to draught conditions, is likely to lead to lowest inventory levels of around 40 million tons against 44.3 million tons last year.
Improving domestic prices:
Sugar prices improving from INR 2200 per quintal to close to INR 2800 per quintal
Increase in procurement price of ethanol:
Ethanol price was fixed at Rs27/- per litre for 3 years in 2009 now about realizations from Ethanol are about 47Rs./Litre
Falling interest rates
Most of the Sugar companies have huge debts in the balance sheet and any interest rate reduction is likely to directly go to the bottom line.
Sugar Price Cycles:
At current levels sugar prices internationally seem to have bottomed out.
>Global Inventory at a 4 year low at 40.5 Mn Tonnes co-insides with sugar prices bottoming out >Brazil Shift to Ethanol, Irregular weather, El Nino. >India Import duty, Export 4mn tonnes, Marathwada rainfall. Low Sucrose
>ISO Predicts shift to deficit. (2.5mn tonnes in 15-16) (6.2 mn tonnes in 16-17)
Government has mandated blending of Ethanol with fuel by Oil marketing companies (OMC’s) to the extent of 5%. Currently only about 2-2.5% is achieved due to unattractive pricing of ethanol
Center has exempted ethanol produced from molasses from central value added tax (Cenvat). This will raise sugar mills’ realisation by Rs five a litre to Rs 47-48 a litre
The lucrative pricing of Ethanol and large demand, with high margins (40%-60%) to sugar industries, shall further spur profitability of sugar companies.
Obtaining of license of ethanol supply by OMC’s will reduce procedural delays.
Prev. Years co’s also made RS, Which will now be substituted by equities.
Benefits of Ethanol mandate:
Gross Margins Matrix:
30 Year Cycle:
Global Sugar Production:
Global Sugar Consumption:
Global Sugar Inventory:
This document has been prepared and compiled from reliable sources. While utmost care has been taken to ensure that the facts stated are accurate and opinions given are fair and reasonable, neither the Company nor any of its Directors, Officers or Employees shall in any way be responsible for the contents. The Company, its Directors, Officers or Employees may have a position or may otherwise be interested in the investment referred in this document. This is not an offer or solicitation to buy, sell or dispose off any securities mentioned in this document.
Pankaj Mangaldas Securities Pvt. Ltd.
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