>Sugar rally getting stronger (MERRILL LYNCH)

■ Reiterate BUY as sugar price at Rs40/kg is ahead of target
Rise in sugar price by 20% in last month to Rs40/kg in Delhi wholesale market compared to our assumption of Rs32/kg in FY10E (YE Sep) is likely to yield significant upside. Key drivers for sugar price rally are (1) concern of further production shortfall in India owing to restrictions on raw sugar imports (2) poor quality of sugarcane; and (3) surge in international price on poor output in Brazil.

We reiterate Buy on Sugar stocks on attractive valuation amidst rising prospect of the tight sugar market lasting until FY11E (YE Sep 2011). Robust profit in Dec09 Q to be reported in Jan 2010 is likely to be the key trigger.

■ Uttarpradesh ban on raw sugar import hurting supply
We have learnt from newspaper reports as well as sugar mills that Uttarpradesh is yet to lift the ban on imports of raw sugar into the state imposed since Nov 2009 in order to protect farmer’s interest. The ban could last until Mar 2010, i.e the end of sugarcane crushing season. At present about 0.7mt of raw sugar is held up at ports including 0.55mt of Bajaj Hindusthan and 0.065mt of Balrampur Chini.

If govt does not allow import during crushing season, then mills will see an increase in cost of production by Rs1/kg and may not be able to import additional quantity, which in turn will affect supply.

■ Weaker cane quality in current season affecting supply too
Amount of sugar recovered per tonne of cane in Uttarpradesh and Maharashtra in the first three months of current season (Oct09-Dec09) is about 20bp lower y-o-y and total sugar production is flat. This is below our estimate of 11% growth in India’s sugar production to16.2mt driven by 50bp increase in recovery. Lower recovery could lead to about 15mt of sugar production in India, which along with restricted raw sugar import could tighten the supply and drive up price further.

■ Poor production in Brazil supporting international price
International raw sugar price (SB1 Cmdty) has gone up 25% in last one month following reports of 30% decline in sugar production in Brazil between 16 Nov 2009 and 16 Dec 2009. Recent shift in usage of cane in Brazil in favour of ethanol has further boosted the outlook of tighter sugar supply globally.

■ Maintain Renuka as top pick owing to its stock pile
Renuka sugar, the largest raw sugar refinery of India, being based out of Karnataka and West Bengal is unaffected by Uttarpradesh’s import ban. We expect Renuka to be the biggest beneficiary of rising sugar price in FY10 owing to its 0.4mt sugar stock at cost of Rs23/kg and contract for another 1.2mt raw sugar.

To read the full report: SUGAR RALLY