Sugar - Limited benefits from hike in import duty - Sector Update

- The government has increased the import duty on raw and white sugar from 10% to 15%. The industry has been demanding an increase in the import duty on both raw and white sugar to 30% - 40% for quite some time as imports were putting pressure on domestic realisations, which are ruling below cost of production. It is estimated that ~0.6-0.7mmt of sugar has been imported in India in the current sugar season.

- With sugar prices not covering production costs, sugarcane arrears to farmers have built up in the system. Presently, arrears on a pan India basis are estimated at ~INR90bn, of which Uttar Pradesh accounts for ~INR45bn. If sugar pricing scenario does not improve, arrears in Uttar Pradesh will remain ~INR15bn in September 2013.

- Imports at the revised rates will not be profitable and we do not expect any further imports at the prevailing sugar prices and exchange rates. Thus, this announcement should lead to a marginal improvement in domestic sugar prices.

- While global sugar prices have declined over the past few months, a depreciating INR vis-a-vis the USD has made sugar exports from Maharashtra feasible.

- Till the price parity remain favourable for sugar exports from India, companies like Shree Renuka Sugars, which operates port based refineries, can make use of Advanced License Scheme (ALS). Under ALS, it can export sugar from Maharashtra and import sugar duty free at Haldia refinery.

- Shree Renuka Sugars, which was importing sugar for domestic market at its Haldia refinery, has shifted the focus to re-exports. With refining spreads remaining stable, hike in import duty is unlikely to impact its refinery operations.

- On the ethanol front, Oil Marketing Companies (OMC) have commenced procurement from sugar companies at ~INR34-35/litre for UP based companies and ~INR36-36.5/litre for companies in southern region. The pace of procurement is expected to gather momentum over the next few weeks. This would improve the profitability of companies with distillery capacities and provide some cash flow support as profits on sugar segment is expected to remain weak in near term.

Our View

Since sugar imports will no longer be remunerative, the trend in domestic sugar price will be determined by domestic supply and export potential (if global prices remain stable at current INR/USD rates). The outlook for the industry would remain challenging, especially for non-integrated companies. We like Balrampur Chini (BUY, TP - INR56) for its strong balance sheet and integrated business model and Shree Renuka Sugars (BUY, TP - INR28) on expectations of turnaround at Brazilian operations. For Balrampur Chini, the key risk remains the announcement of cane price for SS 13-14.

Source : Equity Bulls

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