The sugar sector has been one of the few sectors to be left out of the structural bull in the domestic equity markets. The domestic sugar prices are down continuously to a 5-year low now. Contrary to the trend in the market prices of sugar, the government-advised price for sugarcane moved up by about 58% in the last 5 years! Almost all sugar companies in the listed phase posted losses in the latest quarter. Since 2006, the debt of top 8 sugar companies jumped 3.5 times to Rs 17,426 crore in FY2014. While their operating profits are down by 49%, the total market cap of top 7 sugar companies (solely engaged in sugar business) crashed by 80% despite the Sensex moving up 137% from 12,000 in 2006 April to over 28,400 now!
The sugar sector has been one of the few sectors to be left out of the structural bull in the domestic equity markets. The domestic sugar prices are down continuously to a 5-year low now. Contrary to the trend in the market prices of sugar, the government-advised price for sugarcane moved up by about 58% in the last 5 years! Almost all sugar companies in the listed phase posted losses in the latest quarter. Since 2006, the debt of top 8 sugar companies jumped 3.5 times to Rs 17,426 crore in FY2014. While their operating profits are down by 49%, the total market cap of top 7 sugar companies (solely engaged in sugar business) crashed by 80% despite the Sensex moving up 137% from 12,000 in 2006 April to over 28,400 now!
Recently the government announced an export subsidy of Rs 4,000 per tonne of sugar exported. Still exports are not that profitable as the global sugar prices are also at 6-year low. In fact, last week the Food and Agriculture Organization (FAO) of the United Nations reported the global food prices touching 5 year lows. Perhaps it is quite rare to see food prices also joining the range of commodities like crude oil, iron ore, etc., in the deflationary trend.
Consequent to this crisis in the sugar industry, the sugar mills' arrears to the farmers towards the procurement of cane have touched a record level of around Rs 17,000 crore now. For the current sugar year (October 2014- September 2015), the domestic production of sugar is estimated to be around 25 million tonne as compared to consumption of close to 24 million tonne, leading to continued suppression of sugar prices due to excess supply in the next near term. However, the record level of cane arrears is expected to lead to a massive shift away from cultivation of sugar cane to other crops by the farmers when they start their planting in a couple of months from now.
As the cane takes 12 to 18 months to mature for harvesting, it is most likely that there would be a massive deficit of sugar production in the next sugar crop year (SY2015-16). The same is likely to lead to a substantial run up in sugar prices and, thereby a bull run in the sugar stocks after a gap of almost 10 years could be in the offing next year. The long-term investors can sweeten their portfolios by including sugar stocks. But a word of caution – choose the sugar companies, which are relatively least leveraged, managed to pay dividends in majority of the last 9 years and also have high sugar recovery rates.
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