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Indian Sugar Stocks Turn Bitter – Bajaj Hindustan + Balrampur chini

December 20, 2007

The recent rally in stock prices seems to be building in near best-case scenario on cane prices, for which there is still no certainty. Expect sugar price cycle to start turning up from FY09E, margin expansion will still depend on FY09E cane prices, on which there is little visibility given the current policy uncertainty. Further, cane price increases in FY09E could outpace sugar price increases, which would squeeze margins in FY09E. Bajaj Hindustan and Balrampur chini are downgraded to SELL.

Bajaj Hindustan:
Company’s profits will largely depend on sugarcane prices set by UP state govt. Currently the price fixation process is under litigation and there is not much clarity on the final outcome. The company is expected to report an EPS of Rs 18 for Fy2008 and Rs 11.9 for Fy2009. Citi maintains a SELL with a Target price of Rs 229.

Balrampur Chini:
The company looks well positioned to benefit from the strong growth in sugar demand in India (+4%, 2x global demand). However, in the current weak sugar price environment, as well as uncertainty on sugar policy, we expect profits to be under pressure. The company is expected to report an EPS of Rs 6.1 for Fy08 and Rs 8.96 for Fy09. Citi has set a target price of Rs 88 based on a replacement cost of assets.

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