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ENAM Downgrades Sugar to Underweight

March 17, 2010

The basic premise for the rally in sugar prices was led by the production deficit in India and Brazil, further supported by rising consumption from emerging markets, which depleted inventory levels to historical lows. However the prospects of higher Brazilian output, government intervention and lackluster follow up demand from key EMs has led to sugar prices cooling off by 30% globally and 20% domestically since Jan-10. With Brazilian output coming on stream by April-10, price recovery to previous high’s could be ruled out, unless there are extreme climatic conditions.

Brazilian sugar output for the 2010/11 season beginning April could increase by ~15%, driven by higher cane production and recovery rates. Other large exporters like Australia and Thailand are also expected to see ~7% and ~15% improvement in output. Indian sugar production will also see a 35% increase. This should dramatically improve the global stock-to-consumption ratio from 17% in 2010 to 26% in 2011, at the LT median level.

Lowered free price assumption for FY10 to Rs 33 /kg (earlier Rs 39 /kg) and SY11 to Rs 26 /kg (earlier Rs 33 /kg). Further fall in prices could erode profits as average cost of manufacturing sugar is Rs 28-30 / kg in the current season.

Downgrading earnings with Underweight on the Sector – Bajaj Hindustan, with highest financial and operating leverage, will be relatively more impacted. Shree Renuka under review due to lack of financial clarity on its recent Brazilian acquisitions.

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