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India Sugar cycle getting sweeter – Merrill

April 8, 2009

The sugar price in India could jump 20% in next six months and remain strong for next three years, in our opinion. Key drivers for such a strong up-cycle are – very low production in current season and forth coming season compared to consumption and lack of scope for further reduction in dealer stock level. Increased cost of production as well as cost of imports.

Expect sugar production in the current and next season starting Oct-09 to fall short of demand by 35% and 16% respectively due to cost pressures. Such a shortfall is likely to drive up the sugar price by another 20%, on top of the 54% rise seen so far since Aug-07 trough.

Hence, upgrade Balrampur (leveraged play on sugar price) to Buy. Maintain Buy on Renuka (higher PO) and Triveni. Maintaining Underperform on Bajaj Hindusthan due to high debt and forex loan loss.

Balrampur Chini Mills:
Key drivers of rating change are high leverage to sugar price to result in strong earnings growth, extended period of growth phase to bring in huge benefit of loan reduction and attractive valuation as stock 4.8x FY10E EV/EBITDA and 77x FY10E PE while we expect ROE to rise from 10% in FY08 to 16% in FY10E. Price Target of Rs76 is based on 6x FY10E EV/EBITDA.

Shree Renuka Sugars:
Renuka as the biggest raw sugar refinery of India would be the biggest beneficiary of sharp cane sugar production fall in India as the requirement and profitability of processing imported raw sugar has improved. Raising Price Target by 41% to Rs120/sh on the back of 7% upgrade to earnings driven by 1-7% higher sugar price in FY10-11E. We have also rolled over in PO basis to 6x FY10E EV/EBITDA.

Triveni Engineering & Industries:
Merrill maintains a Buy with a price target of Rs52 on attractive valuation and despite lower leverage to sugar business.

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