Déjà vu for investors in sugar stocks

Share prices may remain under pressure as recent measures are unlikely to provide respite on realisation

As sugar prices continue trending down with estimated production for sugar year (SY) 2017-18 projected to surpass consumption, stocks of sugar companies are erasing most of their phenomenal gains recorded during the 27month bull-run of August 2015 to December 2017. Balrampur Chini, Shree Renuka Sugars and Bajaj Hindusthan have lost between 30 per cent and 60 per cent of their market value in the last few months. Experts said a further downside could not be ruled out, as both the current and the next sugar year could see a production surplus, keeping realisation under stress.

While the production estimates have already been revised upwards to 29.5 million tonnes (mt) for SY2017-18 by the Indian Sugar Mills Association (ISMA), production till mid-March had increased 47 per cent year on year, to 25.5 mt. With domestic sugar demand pegged at about 25 mt, closing stocks are expected to increase to about 8.5-9.0 mt in SY2017-18, much higher than the ideal level of 6 mt. Rating agency ICRA had recently said with production likely to outstrip consumption, sugar mills were expected to face pressure on profitability. According to the ICRA note, this is likely to exert pressure on sugar mills' debt coverage metrics and also adversely affect liquidity indicators, including cane payments.

The pressure was evident in Balrampur Chini Mills' December quarter performance. Standalone net sales increased 6.9 per cent year on year, but were down about 19 per cent sequentially. Operating profit declined 55.6 per cent year-on-year and 23.9 per cent sequentially; net profit fell 65 per cent year on year, both for the second consecutive quarter. With weak sentiment and profitability expected to remain under pressure in the March quarter, the stock touched its 52week low of ~74.50 on March 28. However, news of the government allowing duty-free exports provided some respite.

Allowing duty-free exports of about 2 mt and fixing quota for mills might not appear very lucrative for profitability of the domestic players, as international sugar prices have also dipped to about 30month low. But this can help reduce the production surplus and enhance cash flow of the mills, thereby reducing borrowing costs and allowing them to pay some sugarcane arrears to farmers. This was the only solution, that could provide some respite, said Abhinash Verma, directorgeneral, ISMA. He expects the next sugar season to see a production surplus.

Yet, for producers, the situation remains challenging. The price of sugar at the factory gate is around ~29-30 a kg, against the production cost of ~35-36 a kg, according to Verma. Even adjusting for power co-generation revenues and ethanol production, profitability will remain under stress. Sugarcane procurement prices or FRP (fixed remunerative prices) had already been increased by about 11 per cent for SY2017-18 to ~255 a quintal, whereas sugar prices have declined by about 20 per cent so far.

All this is déjà vu for investors, reminding them of the stressed situation sugar mills had undergone during the 2013-2015 period.