>SUGAR SECTOR: Q3FY10 Result Preview (CENTRUM)

Higher sales, but lower profits
Sugar prices have plunged ~20% QoQ, but are still 18% higher on a YoY basis. Higher sugarcane cost during H1FY10 led to increased cost of cane sugar production (up by ~30% YoY). Margins from cane sugar are expected to be very low during the quarter. The allied businesses of power and distillery are expected to help sugar mills report positive operating margins during the quarter. The revision in levy of sugar price from Rs13.5/kg to Rs17.5/kg is expected to result in a writeback of Rs4/kg (write-back will be on total levy sugar volume, i.e. 20% of cane sugar sale for season 2009-10 ).

■ Strong topline growth expected: We estimate strong top-line growth fuelled by volume growth (main growth will come from through put in raw sugar). Raw sugar release was higher during the quarter, reflecting in higher volumes and resultant higher top-line growth. Sugar prices continued on a downward trajectory, with ~20% QoQ fall to an average of Rs28,500/tonne.

■ Margins to contract: We expect operating margins of our sugar universe to contract by ~900bp YoY due to depressed sugar prices and higher cost of production of cane sugar.

■ Write-back on levy sugar: As the government has revised the price of levy sugar from Rs13.5/kg to Rs17.5/kg, we estimate a write-back of the earlier provision (for inventory write-down in respect of levy sugar by Rs4/kg).

■ BJH expected to report losses; BRCM, SRS andTriveni to report profits: The sugar companies are expected to report subdued performances. We expect Bajaj Hindusthan to report losses. Balrampur Chini, Shree Renuka Sugars and Triveni Engineering are likely to report profit.

To read the full report: SUGAR SECTOR