>INDIA SUGAR (MORGAN STANLEY)

Re-engaging on Better Cycle Visibility – BRCM is Top Pick

India will likely require another ~5mn tons of raw sugar imports in F10: Poor monsoons in the key sugarcane growing area in India will likely limit the F2010 sugar production to ~16 mn tons. This coupled with an opening inventory of around 6 mn tons and consumption of around 22 mn tons means that India will need to import ~5 mn tons in F10 (for refining in F11) in addition to the ~5 mn tons imported in F09. A combination of better cycle visibility, higher cane availability in F11, the continuing raw sugar refining opportunity and absence of government intervention to control sugar pricing drives our industry view upgrade. Given the recent underperformance of North Indian millers, Balrampur Chini (OW) is our top sector pick.

Why the government is unlikely to intervene: Our channel checks suggest that the government will look at controlling the sugar price for only ~6 mn tons of retail consumption. Prices for the remaining ~16 mn tons of wholesale consumption will likely be market determined. The government proposal to increase the levy quota from 10% to 20% is a step to protect the interest of retail consumers of sugar, we believe. This move while positive for sugar millers (it cuts out uncertainty of incremental government intervention) will impact near term sugar consumption adversely, in our view.

Where we differ: 1) The government will likely differentiate between retail and wholesale sugar consumers, thereby reducing risk of ad hoc policy changes to control prices. 2) Domestic sugar realizations will likely continue to trend higher in-line with international parity prices. Sugar prices will likely peak in F11. 3) Sugar refining should continue to drive overall earnings in F11, albeit at lower margins. 4) India is unlikely to be a structural importer of sugar; high cane procurement prices will likely incentivize planting, driving capacity utilization and higher operating leverage in F11.

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