Sugar stocks trip on oversupply, input costs.

MUMBAI: Sugar stocks have underperformed benchmark indices in 2010 on the back of surplus supply and an increase in the input costs of most of the companies.

Sugar prices in India have corrected about 33% from their peaks in January from around Rs 38,000 per tonne to Rs 25,000 per tonne and a majority of broking firms, which have a negative rating on the sector, have advised investors to be cautious.

“Prices have mainly corrected, as there was volatility in global markets on the back of an uncertain global economic scenario. Also, the total production for sugar in India, the largest consumer of sugar in the world, was estimated at around 16 million tonne. But the actual production has been around 18 million tonne, which has caused sugar prices to go down,” said a commodity analyst from a leading broking firm, requesting anonymity.

Share prices of leading sugar stocks, like Balrampur Chini, Bajaj Hinudustan, Shree Renuka Sugars, Dhampur Sugar Mills, amongst others, are all down around 30-60% in 2010 against a 8% fall in the Sensex. Sugar stocks fell on Tuesday, too, in line with the fall in the broader market due to weak global cues. The 30-share BSE Sensex ended at 16022.48 down, more than 2%, on Tuesday.

“We expect the government to impose duty on imports of raw and white sugar. Also, monsoon would be an important factor, as the sugar import will be significantly reduced, if the rains are good, and there will be improvement in margins,” said Kishore Narne, head-commodity, Anand Rathi Financial Services.

Commenting on the sugar prices, he said, the prices peaked out early this year, and on account of healthy output of sugar, the prices would continue to remain under pressure. So, investors should not consider fresh investments in this sector, at least, for the next few quarters.”

In Uttar Pradesh, the cost of production for companies, is around Rs 230-235 per quintal, which comes to around Rs 29 per kg. But if the average prices from the past one month are taken, the cost has come down to Rs 29.32 per kg, indicating a slump in demand. Analysts said that margins have hardly been Rs 2-3 per kg, after prices peaked out in January. And if this continues, a majority of the companies would report losses in the coming few quarters.

“We have a negative view on the sector, as there is no earnings visibility in the short term. Input costs are rising. So, the realisation cost of most companies has gone down. Although India’s dependence on sugar import in FY11 would be lower than what it was in FY10, the domestic prices would still be determined by the import parity price,” said DD Sharma, VP-research, Anand Rathi Financial Services.

Analysts are of the opinion that prices will pick up from August onwards on account of inventory depreciation as about 1.5-2 million tonne of carry forward stock would get utilised by then. Also the ban on futures trading in sugar on NCDEX is likely to be lifted by September which would further boost investor sentiments.

Source : The Economic Times