Indian Stocks Research

Sweet Sugar Stocks

Sweet Sugar Stocks

Stocks to look for
Bajaj Hindustan (CMP – 160 Rs)
Triveni Engineering (CMP – 46 Rs)
Balrampur Chini (CMP – 67 Rs)
Renuka Sugar (CMP – 313 Rs)
Sakthi Sugar (CMP – 75 Rs)
Rajashree Sugar (CMP – 66 Rs)

Introduction
Contrary to the heading sugar stocks has been not so sweet for investors for last 6-8 months. The sector has underperformed the Nifty/Sensex by a wide margin. Forget about underperforming most of the stocks are trading at year lows or near to year lows. The matter is even worse when larger sugar companies are making new lows every day. The once darling of stock markets are now a neglected slot with investors unwilling to commit any money towards sugar stocks. The sentiment towards the sector got a further hit when globally the sugar production is reaching record highs and sugar prices collapsed globally.

Research houses / Brokerages and analyst community acted very fast and flooded investors with downgrading / sell reports on sugar stocks. But as usual they were again very late (just like Indian police reaches the place after the major drama ends). Last week I read a research report from JM Morgan Stanley on the outlook of sugar stocks and with a strong sell on Bajaj Hindustan at the current price of 160. The report also has a negative view on stocks like Triveni, Balrampur, and Renuka etc.
The same is the view with the analyst community which comes on business channels. I cannot see a single analyst recommending sugar stocks now. (In fact quite surprisingly there were many to recommend Bajaj Hindustan at 550Rs (1Re FV)). But at that time sugar prices were touching 22Rs here. Now the situation is very different with the sugar prices hovering at 16-17 Rs mark.

But it seems many are forgetting the basic principle of investing in equities
“There is always an opportunity when there is blood on the street “

This grim situation in the sugar stocks prompted me to take a second look at the sugar stocks and quite surprisingly I found that many sugar companies are now trading at ridiculously cheap valuations. Most of the companies have either doubled or tripled their capacities and have found out additional revenue segments which help them to cope up when the tide changes. So in this report I am planning to cover all major companies in the sugar sector and the future outlook of the sector.

Another comforting factor is that most of the companies are trading at valuation at steep discount to the replacement cost. For example to setup a 1000TCD crushing capacity the average cost is around 25Cr. Here I am talking about Greenfield plants. So to replace a capacity of 60000TCD you require close to 1500Cr. Triveni Engineering having a capacity of 61000TCD is now trading at a market cap of 1100Cr. ( This market cap is combined of sugar and engineering ). Similarly for Bajaj Hind the cost for setting up a 1.5lack TCD capacity would be 3700Cr. The stock is available at a Market Cap of close to 2200Cr.
You can read more about Triveni here
Triveni Engineering : A Value buy

The reasons for my bullish views on sugar are given below

Capacity expansion benefits
In the last one year most of the frontline sugar companies has tremendously increased their crushing capacity. In most cases the increase in capacity was tremendous. For example Bajaj Hind had a capacity of below 70000 TCD (Jan 2006). By 2007 end the total crushing capacity will be close to 150000 TCD. Similarly Triveni which had a crushing capacity of 40000 TCD will have a capacity of 61000 TCD by March 07.

Now what this means is that the sugar companies will tremendously benefit going forward even at the current prices due to increased capacity.
For example Bajaj Hindustan’s sales will rise to something close to 18lack tones from the present 7.2 lack in next one year. Now even a 1 rupee rise in sugar prices will be like adding 150-200 Cr to the bottom line.

Similarly Triveni will have sales of close to 7.5 lack tones in next year. And a one rupee increase in sugar price will be close to 60-80Cr

Now these are tremendous capacity related benefits. Other benefits will come from operational efficiency from this large capacity. Indian sugar majors are about to see the benefits of this in next couple of years.

These kinds of massive expansion plans should catapult Indian sugar companies to the global league apart from other scale related benefits.

Where will the sugar price move?
This is a million dollar question. Especially in the Indian scenario this will have massive implications on the share price of companies. The effect will be visible even for a mere 1 rupee change in sugar price as I stated above. For example a small 1Rupee change in sugar price can increase the revenues by close to 200Cr for Bajaj Hind. And a majority of it will move to the bottom line because of the large capacity the incremental cost of revenues can be dramatically lower. I did a small calculation of Bajaj and Triveni. The EPS change for Bajaj can be anywhere between 8-12 Rs and for Triveni it can be between 2.5 -3 Rs. And this is for just one rupee change in Sugar price.

Now on sugar price. I expect the sugar price to move up gradually over next 1-2 years. This is because of the following reasons.
1. The GDP growth in India and China can have a positive effect on the sugar consumption.
2. High oil prices. In my view oil is unlikely to trade below 50$ mark. And in long run it should settle any where in the range of 60-65$. This is because of the strategic nature of oil. Note the recent case where America decided to double its already high oil reserves over a period of time. This high oil prices will catalyze the production of Ethanol in Brazil and over the world which will convert more and more sugar cane to Ethanol than Sugar. This trend will support the prices of Sugar in long run.
3. Sugar is purely a commodity. All the ups and down in a commodity cycle is applicable to it. Now the prices are down but in long run the prices can reverse.

So due to these factors I feel that this is the right time to buy in to Indian sugar companies which have built massive capacities. In next 1-2 years you will see sugar price in the range of 20-22Rs /KG from the present 16-17Rs / KG


UP Government Incentive Policy: Another bonanza for UP based sugar mills

This is another bonanza waiting for UP sugar mills who bring new capacities / investments in the period from 2004 to 2007-March. The UP Government's Sugar Industry Promotion Policy, 2004, allows mills to claim full refund of purchase tax on cane and cane society commission, exemption from entry tax on sugar and trade tax and administrative charges on molasses, reimbursement of transport cost from the factory up to 600 km outside the State's borders and remission in stamp duty and land registration charges. These incentives are to be given for a five-year period to any company that invests a minimum Rs 350 crore and for 10 years in case of investment of Rs 500 crore and above. Moreover, they are subject to commercial production starting within three years from the date of the policy's announcement, that is, by March 31, 2007

Now most of the big mills in UP like Bajaj Hindustan, Triveni, Balrampur are beneficiaries for this for the next 10 years.

The interesting factor to be noted is that there is no cost for this incentives and it goes straight to the bottom line. Now how much are these incentives rough calculation would be some thing between 1.5rs – 2 Rs / KG of sugar produced from the new capacity.

In absolute terms for a company like Triveni the total addition to the bottom line would be 70Cr and for Bajaj it would be more than 180Cr. Now this figure is based on the current production of sugar. As the crushing increases this figure also increases.

Now this sum is more than their NP figure last year. And this will start flowing from this year for most of the companies for next 10 years.

NB: Now this is why I really doubt our Analyst’s friends in television. How can it be possible that they tent to ignore this factor?. That is also the reason I believe that the recent battering of sugar stocks are nothing more than an operator play to push small retail players out of the stocks.

The most important beneficiaries of this policy will be Bajaj Hindustan, Triveni and Ballarpur, who has built massive capacities and most of these benefits will start kicking in from FY08 ( just one Qtr away).

NB: State of Bihar has also come up with similar incentive for sugar companies. Companies like Rajashree sugar are beneficiaries of that policy.

Co-Generating profits through co-generation
This is one value addition most of the sugar companies are doing to reduce their power cost. But big companies like Bajaj Hindustan, Triveni and Sakthi Sugars had converted it in to an additional revenues stream which comes in to play at non-peak crushing seasons.

Triveni have almost 46MW capacity of this they are selling close to 29MW to the grid.
There is a new twist to the Co-Gen business. Most of these cogeneration businesses are eligible for Carbon Credits. For example the 46MW Co-generation of Triveni can generate close of 150000 (one lakh fifty thousand) Carbon credits.
This carbon credits also form another constant source of revenues which most of these sugar companies in UP get from next financial year for their recent expansion.

Ethanol Story

There is nothing new in this story and every body knows this. Naturally with respect to the increase in sugar capacity the Ethanol manufacturing capacity is also very high. Bajaj will have a capacity of 520 KLPD and Triveni will be having 160 KLPD by this year. Other major players in this field are Renuka and Sakthi Sugars.

Investment Summary

In short the story is looking great and there are many surprise factors. There is a good possibility that this entire sector can get re rated by the market. After all most of these companies are now trading at almost 1/4th of their YH rate.

You may consider investing in a mix of large cap and mid cap sugar stocks. In larger cap stocks Bajaj Hindustan , Triveni , Ballarpur are excellent bets. When you pick mid cap sugar stocks look for location proximity for exports. So stocks like Sakthi Sugar looks good from that aspect. Renuka is a small but very efficient producer. Rest of the stocks you can give a pass. But if the sector re rating happens definitely all stocks will benefit.

Risks

There are lots of risks also when you invest in sugar sector. First risk is that it is a neglected sector right now and mot of the stocks can easily slide 10-15% easily. More over if the sugar prices and Ethanol prices collapse from these levels due to excess global production it can have a big impact on the financials of these companies. As most of the companies are highly leveraged.
But that is a very rare chance and if something happens like that government will come up with some revival packages. I am confident on that aspect because most of the powerful UP politicians are themselves major players in this market. So they wont let it collapse.

Other value buys
Geodesic Information

Aftek


Disclaimer

Author is a software technical consultant based out of Hyderabad. At the time of writing this article he and his family members do have investments in the stock mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. He can be reached at Sajith65@yahoo.com

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to
be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

posted by Sajith @ 10:50 AM