Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!

Stock Opportunities
1154

I understand that the stock prices have gone up a lot in the past two years and there is always the fear of the down cycle. But past performance is never an indicator of the future.

  • In the Balrampur conf call, Vivek Saraogi clearly stated that he is extremely bullish about the future of the industry because of the government support to it.He asked all investors to think long term. Even in case of a sugar surplus. he mentioned that India can easily export sugar like we did in 2015-2016. He also mentioned that the UP government sees more political benefit in making sure that the farmers get paid regularly rather than simply increasing the SAP , more evidence of which will show up next year . He also mentioned that the Rangrajan implementation is still very much on the cards , itā€™s just a matter of waiting till the FRP and SAP catch up with each other. Currently, with the kind of recovery that UP sees (10.67 %), the difference between FRP & SAP is only 30 rupees. We need to wait for this to be close before cane sharing is implemented . Recoveries are constantly increasing for all UP sugar mills and most sugar mills will see an improvement of about 5 - 10 percent this year, a fact that was re-iterated in the Dhampur conf call too. Saraogi also mentioned that the UP government has not reneged on a single PPA with Sugar companies for purchase of power, even though it found the tariffs a bit high. I highly encourage you to go through the Balrampur conf call here

https://www.researchbytes.com/webcast.aspx?WID=132536

Saraogi is a great example of what good corporate governance looks like.

  • One fact we also tend to forget that consumption of sugar is increasing by 0.5 to 1 percent every year in India . The consumption forecast for 2017-2018 is 25.5 million tonnes, which could easily go up to 26 million tonnes the year after.

  • The interest cost for Dhampur this quarter has gone down by 20 percent . Management was confident about reducing the long term debt even more (by about 200 crores ) to end up with a debt of 375 crore by the end of this year . Dwarikesh is looking at becoming long term debt free by end of this fiscal . Hereā€™s the link . Itā€™s mentioned in the article.

https://in.reuters.com/article/dwarikesh-sug-in-sales/dwarikesh-sugar-expects-sales-to-rise-up-to-15-percent-on-higher-crushing-idINKBN1CE0Q4

  • Increasing recoveries, debt thatā€™s going down, continued government support, ethanol prices going northward from next year, management bullishness, there are too many good factors at play here to ignore companies that are trading at 6-7.5 PE in a heated market. The way going forward it to invest in sound vertically integrated sugar companies with competent management like Dhampur, Dwarikesh, Triveni and Balrampur rather than Rana, Ugar etc etc . The original cycliality of the sugar sector was a problem caused by consequent governments raising the SAP arbitarily without looking at the sugar prices, It hasnā€™t worked out well for anyone. Not for the millers(huge losses), not for the farmers (increasing arrears), not for banks (high NPAā€™s) and definitely not for the state government (which had to bear the wrath of the farmers). My bet is on this diminishing cyclicality.

Disclosure : Invested in Dhampur

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1155

Is it just a one quarter thing ?

https://www.outlookindia.com/newsscroll/dwarikesh-sugar-q2-profit-down-18-at-rs-30-cr/1186377/?next

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https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwihv5nY_NbXAhXHMI8KHXA9DP0QFgg1MAI&url=https%3A%2F%2Fenergy.economictimes.indiatimes.com%2Fnews%2Foil-and-gas%2Findia-proposes-new-bio-ethanol-policy-to-spur-rs-5000-crore-investments%2F61755856&usg=AOvVaw1AHY6pJbZ1NfR-A3aqarOK

1158

If people invested in some specific stocks based on governmentā€™s smart city scheme, I am sure those stocks wouldnā€™t have given any returns. Ethanol concepts, have lot of risks in future.

I am not pessimistic about these things but this project has plans for 2030. We donā€™t know what will be happening in 2030.

Maybe oil will trade low. Maybe will trade high.
Maybe electric vehicles will go mainstream and change dynamics.

Maybe no one from current government will be in power by 2030.

So, donā€™t invest based on such far-fetched plans. These are news items and they will remain news items.

Consider it like an item song which remains on peopleā€™s mind for short while instead of real good songs which people love for decades.

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1159

what weā€™ve tried doing here is taking all the points from different quarters and then fitting them together so that we can understand whatā€™s happened in the past and what we anticipate will pan out going forward. Views and feedbacks welcome.

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1160

I was wondering whether we can profit form both sugar cycle and couter cyclical investingā€¦

now that the sugar upcycle has played out well and the sugar mills have sort of paid back most of their debtā€¦and the next sugar season onwards we are going to see excess prodution and beginning of downcycleā€¦

what would the sugar mills do to protect themselves during the coming downcycle of around 3-4 years?

i would guessā€¦that they would increase their ethanol making capacity to protect themselvesā€¦

In the earlier upcycle, the sugar mills had gone for increasing their cogen capacity to tide over the bad days aheadā€¦but that may not be possible in the present upcycleā€¦because no additional crushing capacity has been added and due to renewable power, the cost of power is continuously decliningā€¦

Therefore the counter cyclical move by sugar mills is more likely to be ethanolā€¦where the Modi govt has streamlined ethanol procurement process and its one of the successes of this govtā€¦

i am writing this becauseā€¦PRAJ INDUSTRIES has become very very bullishā€¦on the verge of a multiyear breakout on looong term chartsā€¦

thus the counter cyclical investment wrt to suagr would in my opinion be investment in Praj industriesā€¦

its almost debt freeā€¦and now has very less downside risk and good upside potential

PRAJIND
PRAJIND1364Ɨ739 71.8 KB

Quarterly chart of Praj with momentum indicatorā€¦stock on verge of a multi year breakout and indicator turning up is a heady combinationā€¦very very bullishā€¦stock has potential to go up hugely in coming few quartersā€¦

1161

Most of the sugar cycles have been corrected quite significantly
Did see a movement today, does it mean the worst is over or more pain is there in the offering in this sector.

Disc : Invested in Triveni

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@Mehnazfatima, Can you share your technical chart insights and views on Dhampur for next couple of quarters?

Regards,
Vinoth

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it seems that the sector is being viewed with a lot of pessimism, ignoring the positive aspects. Need of the hour is to understand the overall scenario rather than just looking at sugar and stock price movements.
Although the sector is not looking as attractive as it was a year ago.

But still following points needs to be considered while evaluating this sector:

1.The crushing commenced in October and there was stock limit imposed due to which there was pressure on price.

2.SAP has only be increased by Rs.10/Quintal so we can expect cost of production to be similar to that of last year i.e Around Rs.30/kg

  1. Esp in UP the govt would not want mills to face losses as it translates into loss for farmers too (its turning More political than cyclical in nature)

4.Majority of the management of companies are of the opinion that prices will remain firm throughout the year and will start inching upwards from January onwards.

5.Not to forget ETHANOL.

6.ISMA production no.s could be revised as it was done for last crushing season although chances are less.But still Demand and Supply will be near about equal only, not excess and also consumption will also increase.

Views are invited.

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1164

Roundup on sugar for this week. Some recent developments -

1.Production and consumption numbers look balanced for FY17/18. But for the next 12 months there will be no import or export out of India, as per industry sources. Too early to say about 2018/19.

2.Government will try to ensure sugarcane farmers remain happy. For this, they will have to ensure sugar mills remain healthy. Government is already taking steps such as removal of export duty on sugar, removal of stock holding limits, etc.

As per Dhampur Sugars Q2 concall, the total cane price arrears in India was almost one-fifth of what it was two years back. So because sugar prices have been stable thatā€™s why almost pan India cane price payments have been extremely prompt and that is one of the reasons also that we have seen that sugar which last year was produced 20.2 million tonnes is expected to go up to around 25 that is mainly due to rains and secondly due to prompt cane price payments. **He said they are very sure of the fact that high cane price is not the need of the hour. The need of the hour is timely payment of cane price.** Seeing that I do not believe there will be a very high increase if any next year.

Sugar prices will have to remain above 33/34 for this whole sugar chain to remain healthy in my opinion!

3.Acreage and Yield, as per Dhampur concall - Cane acreage this year in UP is up by 9%, which will improve further next year. The other thing which has happened is that because of the cane variety 238, the yield/acre is about 1.5 times. Acreage of variety 238 has gone up a lot but there is still a lot more room for it to go up. So with both the acreage and yield per acre, the cane crop will be higher in 2018 year also. Yield is crucial for both farmer and mill. 3 years back, average yield was 9.5, now it is 10.66.

Sugar mills want to increase no. of crushing days from 140-150 (3 years back) to 180-200 in order to improve productivity. With new crane variety and increased acreage, this is possible as crops are ready 10-15 days earlier than it used to be.

4.Moreover, ethanol production is on the rise, which will help all sugar mills. The government last month raised ethanol prices by 5 percent to 40.85 rupees ($0.6375) per lit before tax for the year that began Dec. 1. Indian sugar mills are set to more than double the supply of ethanol to fuel retailers for blending with gasoline in 2017/18, expecting a sharp rise in the local output of the sweetener. Ethanol manufactures and OMCs finalized supply contracts for a record 1.4 billion lit for FY17/18, compared with 665 million lit in FY16/17. Furthermore, more molasses availability and that too at much lower pricing point will lead to higher cogen, resulting in improved profitability.

https://timesofindia.indiatimes.com/business/india-business/india-sugar-mills-to-double-ethanol-supply-as-output-jumps/articleshow/62180157.cms

5.On the other hand, increased production in India and Brazil would result in downward pressure on sugar prices.

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1165

Anil Kumar Goel ainā€™t giving up on DHAMPUR SUGAR. Is there something special about this company or the whole sugar sector scenario has changed , even after meltdown in sugar prices?

http://www.bseindia.com/xml-data/corpfiling/AttachLive/06323a64-aa4f-4613-943a-1761bb53ea70.pdf

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Government to consider hike in sugar import duty, cut export duty

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Given the news the sugar stock should have ideally gone up but most of the stocks fell (ex - Triveni, Dwarikesh)
Any reason for the fall inspite of the government intervention.

Disc : Invested in Triveni

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Maybe here is answer to your question -

Despite knowing the sugar output this season is unlikely to be much higher than consumption, many large and medium sized mills have been selling sugar in distress to clear cane dues to farmers.

The ISMA has written to the Union food ministry to initiate talks with the governments of Sri Lanka and Bangladesh, which import around 3.5 million tonnes of sugar annually. These two Asian countries, however, import their entire sugar requirement on preferential duty from Pakistan and Taiwan.

India is a signatory to the South Asian Free Trade Agreement, but sugar has been kept out of this treaty. Sri Lanka and Bangladesh impose import duties of $90-190 a tonne on sugar, which makes Indiaā€™s exports uncompetitive.

ā€œBilateral trade with duty relief from a deficient country does not violate World Trade Organisation norms, although we do not expect opening up of exports before April,ā€ another official said.

Pakistan provides sugar export incentives of Rs 1,100 a quintal for shipments up to 1.5 million tonnes. Indian exporters will remain uncompetitive for exports to any country with such an incentive from the Pakistan government to sugar mills in that country.

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1169

Is it worth entering sugar stocks at current levels as a contact bet or more downfall expected. Not able to understand sugar cycle. Why stock prices falling so much so fast.

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1170

Dwarikesh sugar Q3 concall might give u some clarity.

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1171

Dcm mgmt said sugar should recover from mid feb as crushing season comes to end in Maharashtra and gujarat. Though, risk reward isnā€™t favourable now.

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I canā€™t find the Dwarikesh Concall transcript. Can you please share if you have it.

Regards
SJ

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Audio transcript is available at researchbytes.com