>SUGAR SECTOR (ULJK SECURITIES)

Turning Sweet for Investors

The global sugar industry is entering an era of lower production regime, which is reflected in the sugar prices. Besides, strong GDP growth in developing economies particularly India and China has led to an increase in the global sugar consumption. During the last decade, world sugar production has grown by a CAGR of 1.71% while the global consumption has increased by 2.25%. We believe the current miss match in production and consumption scenario in the global sugar will push up the sugar prices, helping the sugar producers particularly in India. We initiate coverage on the sector with a near‐term positive outlook backed by lower production, increase in per capital consumption, and improved balance sheet quality of the sugar companies.

INVESTMENT RATIONALE
Domestic production in sugar season ’09 is expected to be at 14.7mn tons: Sugar production in the current season is expected to be around 14.7mn tons, which will result in a deficit to the tune of 8.3mn tons for the season. For the coming season, the production is expected to remain low due to the current fallout in the monsoon and the lower cane acreage. This will continue to push up the sugar prices.

International prices are at very high levels: International raw sugar prices are at around $22/lb, which is very high compared to Indian prices. This makes the import of raw sugar nonviable. To reach a viability position, Indian prices have to catch up with the international prices, which means a better realisation for the sugar companies.

Companies are out of the capex cycle: Most of the sugar companies have done heavy capex in the last sugar season and consequently, have raised a huge amount of debt. In the present up‐trend cycle, the companies are not planning for huge capex and will use the cash flows to reduce their debt. This will improve the balance sheet of the companies.

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