SUGAR STOCKS Return of 100% From Current Levels

SUGAR STOCKS – BEST DESSERT TO REMOVE ALL BITTERNESS.
UP sugar mills have challenged SAP of sugarcane for season 06-07 and 07-08, which was fixed by the UP Govt at Rs.125 per quintal after which petitions remains pending for hearing in the Apex Court. The Allahabad High Court in one of its order dated 19/12/2007 had quashed the SAP for season 06-07 being arbitrary and unreasonable. It directed the UP Govt to reassess SAP and refix the price in due consultation with various parties involved. Subsequently, the Apex Court by its interim order dated 27/02/2008 had directed the sugar mills to pay at Rs.118 per quintal for season 06-07. Practically all the sugar mills in UP have paid and discharged this liability, at Rs.118 per quintal and hence nothing much is likely to accrue for this year.

However the Lucknow bench of Allahabad High Court vide its order dated 07/07/2008 has upheld SAP of Rs.125 per quintal for season 07-08. Subsequently, Apex Court by its interim order dated 15/05/2008, had asked mills to pay at Rs.110 per quintal for season 07-08. All the sugar mills in UP, have paid at Rs.110 per quintal and even the financial accounts of those companies were finalized with sugar cane price taken at Rs.110 per quintal. If the Court will ask the mills to pay at Rs.125 per quintal, there would be an additional liability of Rs.950 crore, to be paid by the mills to the farmers.

It is likely that the UP sugar mills might prefer an appeal in the Apex Court against dismissal of their petition challenging SAP for the season 08-09, at Rs.140 per quintal or may go for review, in Allahabad High Court. But this seems to be a symbolic protest by the mills as it’s being fought to strengthen their old cases of SAP for seasons 06-07 and 07-08. No relief is likely to come, except for clarifications on rebate/deduction of Rs.10 per quintal, being transportation charges on sugar cane, brought from farms to the factory, by the farmers.

In this background, it is certain that cost of production for UP sugar mills will be higher this year, mainly due to low recovery and higher cost of sugar cane. In Karnataka and Maharashtra, sugar cane prices are ruling at Rs.1300 to Rs.1,500 per MT with recovery of 11% to 11.5%. In Tamil Nadu, the cost of sugar cane is at Rs.1,200 per MT, but mills run on an average of 270 to 300 days in a year, as against the average of 200 days in Maharashtra and 160 days in UP.

Season 08-09 has started with an opening stock of 9 million tonnes and production is not likely to exceed 19 million tonnes. Government having earlier estimated a production of 22 million tonnes has scaled it down to 20 million tonnes. On an estimated domestic consumption of 23 million tonnes and expected export of 1 million tonne, the closing stock will be abysmally low at 4 million tonnes, on 30/09/2009.

This will lead to a sharp rise in the sugar prices, which may start happening from end of April 2009 as crushing in most parts of the country would come to an end, as also, the general elections in the country would be in its final stages of completion. Government would be keen to control the sugar prices, in retail, at Rs.22 per kg, as any rise in sugar price could cost dear to the Govt in the elections, which is always a very sensitive issue.

Brazil, the largest sugar producer in the world, which has six months crushing, will also end its season in December and post that; even international prices of sugar will start rising. On the domestic front, sugar prices have risen by about 50 paise per kg in the last 15 days and is now ruling at Rs.18 per kg, ex-mill in UP and at Rs.17.50 per kg in other parts of the country.

Coming on the working and viability of UP sugar mills, cost of sugar cane is expected to be Rs.14.50 – Rs.15 per kg, assuming an average recovery of 9.50%. Adding the cost of production of Rs.4 - 4.50 per kg, the total cost to the mills would be Rs.19 per kg. Molasses and baggasse could give an average realization of Rs.4 – 4.50 per kg of equivalent sugar. This means, presently, UP mills would be making a pre-tax profit of Rs.3 – 3.50 per kg of sugar. From May 09’, this would cross Rs.5 per kg.

However, the situation for non-UP sugar mills would be better due to lower cost of sugar cane and higher recovery, coupled with higher number of crushing days in Tamil Nadu.
In summary
All these cast a positive light on all the sugar stocks across the board. Those who have a 12-18 months perspective can buy them at the current levels and can expect a return of 100% during this period.
Thanks
Renuka sugar;
India Glycols Ltd.