>Sugar Sector Update (LKP SHARES)

….sweet gains on shortage

INVESTMENT ARGUMENT

• Steep drop in sugar production this season in India: Given the opening inventory of 8mt and production of 16.5mt we believe that India would need to import 2mt of sugar given the consumption of 23mt if there has to be a closing inventory of at least 3.5mt which is a stock to use of 15% - a steep drop from the levels of 45% witnessed in FY'07 and 35% seen in FY'08.

• Even a production of 20mt next fiscal would not help: With this opening inventory of 3.5mt even if production next season were to touch 20mt the scenario would just about match our consumption and India would still need to import at least 2.5mt to maintain a minimum closing inventory of 3.5mt and the stock to use ratio of 15%.

• Sugar gets sweeter: Lower cane cultivation owing to attractiveness of alternate crops and poor recovery of 9% in the state of UP has led to diversion of cane to gud and khandsari leading to firming up of sugar prices. Yields have declined in both the ratoon crop as well as the plant crop and the lower sucrose content in the cane has impacted recovery as well.

• Sugarcane prices driven politically: Given the fact that mills in UP have to pay significantly higher prices for cane compared to peers in southern parts of the country, we expect UP based mills to face a double whammy of higher cane costs and shortage of cane.

• South based sugar mills would benefit : South based mills crush longer and pay less for the cane and the cane availability is not as bad as that in UP, AP and Maharashtra.

To see full report: Sugar Sector