Sugar Sector: Excess Output Likely To Negate Policy Support.

Sugar companies reported better financial numbers for the March 2011 quarter unlike the dull performance in the previous three consecutive quarters. Improved sugar volume and lower raw material costs were the major triggers of revival in the March quarter. In the near term, the government's decision to reconsider deregulation of the sector and policy on sugar exports would largely drive valuations of sugar companies.

The ET Sugar index, comprising 32 companies, has dropped by 20% in the past six months. The fall tracks the crash in sugar prices due to excess production of 24.5 million tonnes in current sugar the season (October '10 - September '11) against consumption expectation of 22 million tonnes. Sugar prices in India have softened by 8% in the past six month. The drop could have been sharper but for the government's decision to export sugar besides relaxing the levy quota for the free sale in the market.

Globally, raw sugar futures prices have jumped 14% at New York Commodity Stock Exchange over the past one month. This is due to the lower-than-expected production from Brazil in the current sugar season. International prices are likely to face a marginal downward pressure with the projected surplus output in India, the second largest sugar producer in the world after Brazil.

To stabilise sugar prices in India, the government recently allowed export of 5 lakh tonnes of sugar. Further, fresh talks on decontrol of the domestic sugar sector, which has been on the cards for quite some time, may bring relief to sugar companies. This will reduce the pressure on operating margin of companies in times of supply glut by deregulating raw marerial prices. Currently, state governments control minimum support prices for sugar cane.

The government has also revised upwards the price of ethanol, a byproduct of sugar mills. But this will have limited impact, as ethanol production is just a small part of revenues for sugar firms.

With the expectation of excess production and stable sugar realisation, the sugar companies' operating profit may be restricted despite the boost by policy measures. However, those with exposure to global markets, such as Shree Renuka Sugars, may be in a better position to counter the impact of a downward trend here.

Source : economictimes.indiatimes.com