>SUGAR SECTOR: Q1SY12 Results Preview

Profits to remain under pressure
We expect the profitability of sugar companies to remain under pressure impacted by higher sugarcane costs. The Uttar Pradesh government increased the SAP (State Advised Price) for Sugarcane to Rs240/quintal for SY12 against Rs205/quintal in SY11. Higher cane costs will impact the profit of UP based mills adversely and we expect them to report losses in SY12E. Average sugar price (S grade Mumbai) during the quarter was up 5.9% QoQ to Rs29.9/kg. Going forward, we believe that the increase in sugar production to 25.5mt in SY12E against 24.2mt in SY11 will lead to an increase in inventory levels, which in turn, will put pressure on domestic sugar prices leading to subdued profitability of companies. Post a steep correction of 35-53% in the stock prices since our sector initiation in September ’11 and cyclical-low valuations, we had upgraded our coverage universe (Triveni- from Hold to Buy and Bajaj Hind- from Sell to Hold) post Q4SY11 results. However, there can be near-term challenges due to higher than expected sugar production, which may put pressure on sugar prices. The triggers for upside would be a) building up of cane arrears in this crushing season b) further allowance of exports by the government c) higher than expected sugar price and d) decline in area under sugarcane cultivation for next crushing season.


■ Sugar price remained high in this quarter: Sugar price (S grade Mumbai) during the quarter increased 5.9% QoQ to Rs29.9/kg. Current sugar price (S grade Mumbai) is at Rs2,956/quintal. Going forward, we believe that sugar price will be under pressure due to our expectation of increase in inventory levels (7.2mt by SY12-end against 5.8mt in SY11-end).


■ Export of 1mt allowed during the quarter: The government allowed 1mt of sugar exports under OGL (Open General License) quota in this quarter, which will help the companies generate additional profits.


■ Decline in global sugar price: Global sugar price declined by 20% YoY and 8.6% QoQ to US$596/tonne during the quarter. The decline in global price was driven by the expectation that decline in Brazilian production would be offset by higher sugar production in India, Thailand and Russia.


■ Valuations attractive though near-term challenges persist: Post a steep correction of 35-53% in the stock prices since our sector initiation in September ’11 and cyclical-low valuations; we had upgraded our coverage universe (Triveni- from Hold to Buy and Bajaj Hind- from Sell to Hold) post Q4SY11 results. However, there could be near-term challenges due to higher than expected sugar production, which may put pressure on sugar prices. Current sugar price at 30-31/kg is higher that our expectation of Rs28/kg in SY12E and we would review our price assumption as the crushing season progresses. We maintain Buy on Triveni Engineering & Industries and Shree Renuka Sugars. We have a hold rating on Bajaj Hindusthan.





Bajaj Hindusthan (Hold, Target Price: Rs31, CMP: Rs28.7)
􀂁 We expect the company to sell 3.3lakh tonnes of sugar in the quarter with an average
realization of Rs30/kg. Net sales of the company is expected to decline 25.1% YoY (but, increase 3.1% QoQ) to Rs11bn
􀂁 EBITDA is expected to decline 14.8% YoY (but, increase 14.6x QoQ) to Rs2.2bn. EBITDA margin in the quarter is expected to be 20% against 17.7% in Q1SY11 and 1.4% in Q4SY11
􀂁 Interest cost is expected to increase 21.5% YoY to Rs1.3bn
􀂁 Profit is expected to decline 79.8% YoY to Rs117mn. In Q4SY11, the company had reported loss of Rs1.2bn.


Shree Renuka Sugars (Buy, Target Price: Rs46, CMP: Rs30.3)
􀂁 Consolidated revenue is expected to decline 7.2% YoY and 10.7% QoQ to Rs20.8bn in the
quarter. Sales volume of the company is expected to be 2.8lakh tonnes in India at an average
realization of Rs28.4/kg. Sales volume in Brazil is expected to be 2.1lakh tonnes.
􀂁 EBITDA is expected to increase 16.5% YoY and 43.5% QoQ to Rs3.5bn mainly because of higher realizations in Indian markets
􀂁 EBITDA margin is expected to be 16.8% vs 13.4% in Q1SY11 and 10.5% in Q4SY11
􀂁 Adjusted PAT is expected to decline 19.7% YoY to Rs533mn


Triveni Engineering (Buy, Target Price: Rs23, CMP: Rs16.3)
􀂁 The company is expected to sell 1.16lakh tonnes of sugar in the quarter at an average
realization of Rs30/kg. Revenue is expected to decline 25% YoY (but, go up 16.7% QoQ) to
Rs4.4bn. The results are not comparable on YoY basis, due to the de-merger of turbine business
in April ’11.
􀂁 EBITDA is expected to decline 35.5% YoY and 11.4% QoQ to Rs449mn. EBITDA margin in this quarter is expected to be 10.1% against 11.8% in Q1SY11 and 13.3% in Q4SY11
􀂁 Adjusted PAT is expected to decline 84.1% YoY to Rs38mn


To read report in detail: SUGAR SECTOR