>SUGAR SECTOR (HSBC)

Price rise likely despite the sugar futures trading ban

• Ban on sugar futures trading unlikely to impact gradual rise in sugar price

• Levy price revision and power tariff increase for companies based in Uttar Pradesh are potential positive triggers

• Reiterate OW(V) ratings on Shree Renuka (TP increased from INR125 to INR150) and Balrampur Chini (TP increased from INR90 to INR105), and UW (V) on Bajaj Hindusthan (TP unchanged at INR65)

■ Ban on sugar futures trading until December 2009: The Forward Markets Commission has suspended futures trading in sugar until December 2009 as a precautionary measure, considering the demand-supply scenario and inflationary concerns. We believe the government has put forward this measure to avoid speculative spikes in sugar prices, but in our view the price is likely to rise gradually despite the ban as 1) there is a demand supply mismatch: 2) raw/white sugar imports are unviable at the current sugar price level, 3) sugar inventory levels are likely to remain tight at the end of the sugar crushing season (October-September).

■ Potential triggers: The government may revise the statutory minimum price (SMP) for sugar
cane from INR82/quintal to INR107/quintal (Business Standard, 21 May 2009). The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP should increase levy prices by INR2-3/kg from the current INR13.8/kg. We estimate this could lead to an increase of 3-38% in earnings for the sugar stocks under our coverage in FY10. Also, managements of companies based in the state of Uttar Pradesh (UP), Balrampur Chini and Bajaj Hindusthan, have said that they expect tariffs for their power co-generation division to rise from INR3/unit to INR4/unit. If this happens, it could be another potential positive trigger for these stocks, and we estimate that such a revision would increase earnings for these companies by 13-22% in FY10

■ Maintain Overweight (V) on Shree Renuka (TP INR150) and Balrampur Chini (TP INR105): We value sugar stocks using PB- and EV/EBITDA-based valuation methodologies. We have increased target PB multiples for Renuka from 3x to 4x on expectation of higher refining margin and Balrampur from 1.5x to 2x based on above mentioned potential triggers.


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