n         Sugar Cycle Attractively Poised at an Inflection Point

Sugar like most other commodities is cyclical in nature. Increased production of a commodity like sugar year on year, leads to lower market price realizations and higher inventory for the sugar mills. As a result, there is financial pressure on the mills – leading to higher arrears (amount due not paid) to farmers for the raw material (sugar cane). Farmers, therefore switch to other crops, reducing the cultivation area under that particular commodity. This results in production of the commodity dropping and prices rise. As a result sugar stocks behave differently, compared to other common stocks.

The stock prices of sugar companies increase at the beginning of the sugar cycle. The beginning of sugar cycle is marked by a dip in production after two to three years of continuous increased production. We expect production for the sugar year SY’2002-2003 (Oct’2002 to Sep’2003) to fall by 7.85% to 170 lakh tones after four years of continuous increased production, which would mark the beginning of a new sugar cycle. We estimate, that the sugar price is likely to bottom out around the levels of Rs.11.5-12 for M-30 variety and Rs.11.25-11.75 for S-30 variety (East U.P. delivery rates) over the next few months. Most sugar companies are likely to record one of their worst performance in FY’2003, while their stock prices could bottom out much before the results.

We expect, sharp percentile growth in bottomline for most sugar companies post FY’2003 results, primarily due to increased sugar prices and also helped by the low base effect. In such a scenario, BCML is likely to benefit most as the company’s sugar sells at a premium to the market price. We expect BCML to post a 161.69% growth in bottomline for FY’2004 at Rs.85.39 crores, compared to estimated Rs.32.63 crores in FY’2003.

A look at the chart below depicts how the sugar production in India, has been steadily rising over the years. Sugar production has steadily increased from 129 lakh tones in SY’98, to around 184.5 lakh tones in SY’2002, a CAGR of 9.4%. However, for the coming SY’2003, production is likely to dip for the first time in over four years to around 170 lakh tones, a decline of 7.85%.

Chart 1: Sugar Production over the years (Lakh Tones).

§            Source: ISMA.

The fall in production by 7.85% to 170 lakh tones for the Sugar Year 2003 should also help in bringing down the huge inventory levels that is plaguing the industry. Closing stock of sugar likely to fall by 14.81% to 103.50 lakh tones for the Sugar Year 2003, compared to 121.50 lakh tones for the current (Sugar Year) SY’2002. The chart in the next page (chart 2), depicts how the closing stock is slated to dip for the first time after three years of consecutive increases.

Chart 2: Closing Stock (Lakh Tones)

The sugar cane crop has been in growth mode though there have been fluctuations, with sharper increase in last 15 years. The growth can be attributed to:

·     Government’s thrust on sugar production - planned growth.

·     Govt./State Agriculture Dept’s input on field extension, seed varieties and crop maintenance.

·     Cane development programs of sugar mills.

·     Increase in cane support price covering more than input costs.

·     Crop switch resulting in more crop area in sugar cane due to better return.

·     Increased irrigation facilities and increase in energy consumption for irrigation.

·     Favorable monsoons.

Government fixes the price to be paid for the sugar cane every year, which is known as Statutory Minimum Price (SMP). However, SMP’s are not the cane price, which are actually paid to farmers. Many sugar-producing states declare State Advised Prices (SAPs) for canes, basing mostly on political criteria and less on economic reasons. For the sugar year 2003, the U.P. Government has again announced Rs.95/quintal as SAP. However, this time most mills are not accepting to the above cane price, as production would then be unviable keeping the prevailing seven-year low sugar prices in mind.

A look at the chart below depicts how the cane prices (raw material for sugar) in Uttar Pradesh have been steadily rising since sugar year 1991-1992, from Rs.45/Qtn. to around Rs.95/Qtn. for the sugar year 2001-2002, a CAGR of 7.76%.   

Table 1: Statutory Minimum Price & State
Advised Price Differential in U.P. (In Rs./Qtn.)

Chart 3: Closing SMP & SAP

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