Friday, August 28, 2009



Sugar prices in India are on a structural rise due to positive macro fundamentals and we expect them to firm up even further over the next 12-18 months. The primary reasons for this are:

1) A 45% YoY fall in sugar production in India in 2008-09 sugar season

2) Contracted area under sugarcane cultivation for next year due to diversion of cane into other remunerative crops

3) Expectation of further weakness in 2009-10 sugar season due to poor monsoon in large sugarcane producing states in India

4) Tightening of the global demand supply situation due to steady growth in consumption and lower production in India, the EU, Australia, Thailand and Pakistan

5) Expected low levels of closing sugar stocks for current as well as next year

India witnessed a significant drop in sugar production in sugar season 2008-09 due to diversion of cane into other remunerative crops, adverse climatic condition, fall in yield of sugarcane and lower sugar recovery. At 14.5 mn tonnes, sugar production for the year came down 45% YoY against about 22.5 mn tonnes of domestic sugar consumption. The prospects of an expected rebound in sugar production to around 20 mn tonnes for sugar season 2009-10 seem unlikely now due to poor monsoon in some of the large sugarcane producing states of India. With sugar consumption expected to grow at 2-3% annually, India is staring at two consecutive deficit years. The low closing sugar stock for the current year means India would have to import between 4-5 mn tonnes of additional raw sugar for next year to meet the deficit. The expected purchases
by India from international market have caused international raw sugar prices to spiral upwards. Brazil has allocated over 42% of sugarcane to sugar production compared to 39.5% last year due to the relative price spread in favour of sugar than ethanol; this allocation is expected to go up further by the end of the year.

We believe Shree Renuka Sugars is well positioned to take advantage of this situation. The fact that they are among the few sugar companies in India that have focused on building sugar refining capacity will work to their advantage. The company has visibility on its raw material for next year and we expect it to achieve a high throughput next year. We are bullish on the stock with a STRONG BUY rating and price target of Rs. 232.


The global sugar trade has been dominated by Brazil and EU. Brazil is the largest producer of sugar and has increased its production significantly since deregulation in 1999-2000 when sugar price controls and government mandated sugarcane prices were eliminated and private participation in sugar exports were encouraged. India is the second largest producer followed by

China, USA, Thailand, Australia, Mexico and Pakistan. Global sugar production increased from approximately 134 mn tonnes in 2000-2001 to 167.2 mn tonnes in 2007-2008 and expected to decline to 154.9 mn tonnes in 2008- 2009 (Exhibit I) according to F. O. Licht’s July 2009 estimates.

The world’s largest consumers of sugar are India and China followed by Brazil, USA, Russia, Mexico, Pakistan, Indonesia, Germany and Egypt. The world consumption grew from approximately 131 mn tonnes in 2000-01 to157.6 mn tonnes in 2007-08 and is projected to grow to steadily due to combination of world GDP growth and population growth (See exhibit in report)

To see full report: SHREE RENUKA SUGARS