>Shree Renuka Sugar (ALCHEMY)

High leverage to sugar prices
* We believe Shree Renuka Sugars (SHRS) will be one of the prime beneficiaries of rising sugar prices aided by strong volume growth. The company will emerge as India’s largest sugar producer in FY09E by producing 900,000MT of sugar (includes both cane based sugar and refined sugar).

* On the other hand, Bajaj Hindustan (Bajaj) and Balrampur Chini (Balrampur) are expected to report 45%-50% decline in sugar production in FY09E due to lack of sugarcane availability and absence of refining facility.

* Though Bajaj and Balrampur had the advantage of a low cost inventory (+300,000MT each) at the beginning of the season, inventory gains have been largely realized in 1QFY09. Incrementally, SHRS will enjoy much higher leverage to sugar prices compared with peers due to sharp increase in refinery output in 2HFY09E, lower conversion costs and increase in refining margin due to rising domestic sugar prices.


Favorable demand-supply scenario

* We expect two consecutive years (SS09E and SS10E) of sugar deficit in India – led by a sharp drop in sugar production in the current season (SS09E) to 14.5mn MT and relatively lower increase in sugar production in SS10E (at ~19-20mn MT compared to consumption of 23mn MT per year).

* Hence, we expect India’s inventory of 8mn MT to get replenished by the end of current season (SS09E).

* The world sugar production is also expected to decline to 153.5mn MT in SS09E against the consumption of 165mn MT – resulting in a deficit of 11.5mn MT (Source: Kingsman Report). The drop in sugar output is led by India, Thailand, Pakistan and China.

* Consequently, we expect sugar prices to remain firm with an upward bias – at least till the end of current crushing season (September 2009). In fact, domestic sugar price have moved up by Rs1.5-2/kg in the past one week to Rs22.5-23/kg – led by an anticipated shortfall in production.

* In the event of the government allowing duty free white sugar imports, we foresee potential imports once domestic sugar prices reach above Rs24/kg. However, international prices may also firm up in such a scenario.

To see full report: RENUKA SUGAR