Why import duty hike may not sweeten sugar cos' fortunes.

The government recently increased the import duty on raw and white sugar from 10 percent to 15 percent, a move aimed at curbing import of sugar and improving the bearish sentiment in domestic market.

The move would, however, lead to rise in sugar prices across the country.

The industry has been demanding an increase in the import duty on both raw and white sugar to 30 percent to 40 percent for quite some time as imports were putting pressure on domestic realisations, which are ruling below cost of production. It is estimated that approximately 0.6-0.7 million metric tonne (mmt) of sugar has been imported in India in the current sugar season.

With sugar prices not covering production costs, sugarcane arrears to farmers have built up in the system. Presently, according to broking firm Antique, arrears on a pan India basis are estimated at Rs 9,000 crore, of which Uttar Pradesh accounts for Rs 4,500 crore. "If sugar pricing scenario does not improve, arrears in Uttar Pradesh will remain Rs 1,500 crore in September 2013," Antique says in its research report.

Antique believes imports at the revised rates will not be profitable. "We do not expect any further imports at the prevailing sugar prices and exchange rates. Thus, this announcement should lead to a marginal improvement in domestic sugar prices," it says in the report.

While global sugar prices have declined over the past few months, a depreciating rupee vis-a-vis the dollar has made sugar exports from Maharashtra feasible.

"Till the price parity remains favourable for sugar exports from India, companies like Shree Renuka Sugars, which operates port-based refineries, can make use of Advanced License Scheme (ALS). Under ALS, it can export sugar from Maharashtra and import sugar duty free at Haldia refinery," Antique says.

But overall, Antique says, the outlook for the industry would remain challenging, especially for nonintegrated companies.

STOCK-SPECIFIC

Antique has a buy on Balrampur Chini with a target price of Rs 56, citing its strong balance sheet and integrated business model. "For Balrampur Chini , the key risk remains the announcement of cane price for sugar season '13-14," it says.

Source : moneycontrol.com