Thursday, November 12, 2009


Sugar prices to remain high until 2011. India’s sugar inventory is at a 10-year low (1.7 months of consumption) after a sharp fall in production in the last crushing season (CS) 2008-09. More importantly, production is unlikely to recover in CS2009-10 – the government estimates cane
production will fall 9% y-o-y due to low acreage and this is likely to lead to an historical high 7mt of imports. Furthermore, and despite assuming 30-40% y-o-y FY11 increase in sugar production, inventories will remain tight. Thus, we expect sugar prices to remain high until 2011.

Raising earnings estimates. We expect operating margins to expand as the sugar price increase will be greater than cane cost inflation, and imports will lift volumes and profits. We raise earnings estimates by 40-200% for companies under our coverage for FY10-11; our estimates are now 20- 61% above consensus for FY10.
Higher sugar prices and tight inventories likely to persist till 2011
We boost earnings for India sugar companies by 40-200% for FY10-11
Upgrade Bajaj Hindusthan to OW(V) from UW(V).
Retain OW(V) on Shree Renuka, Balrampur Chini & Triveni Engg

Attractive value and robust earnings. Although valuation multiples (price to book) have expanded 75-220% in the past year, they are still near multiples traded in the last downcycle
of FY07-FY08. We believe that further re-rating is likely as we forecast earnings growth of 26-72% and expect almost debt-free balance sheets by the end of FY11e.

Our top picks are Shree Renuka Sugars (largest importer, strategically located and has highest return ratios) and Bajaj Hindustan (most sensitive to sugar price rise).

Key risks. Higher cane cost, lower levy price and government intervention are key risks to earnings.

To read the full report: SUGAR SECTOR