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


(Gaurav Agarwal) #1191
  1. Latest figure from ISMA project sugar production at 29.5 million tons, with Indian consumption at 25 million tons surplus will be 4.5 million tons.

  2. Indian producers are talking (media report) of exporting this surplus with government support. At Govt. support of Rs. 10/kg. Govt. will need to provide a support of 4500 crore for 4.5 million ton and 2500cr for 2.5 million. Later seems to most likely scenario since Indian producers will like to keep some buffer stock.

  3. With Spot prices in NCDEX hovering around Rs. 30.5/kg and production cost at Rs. 32 industry is likely to make a loss of Rs. 2/kg. This will lead to cane arrears which are hovering around Rs. 14k cr as per Livemint news report.

  4. I think most of the mills will do losses in Q4FY18 except for I do not know how Distillery and Cogen plant of some of the mills like Triveni etc will do. Also, how does Distillery dynamics work? Can companies produce as much Ethanol as their capacities are? Who buys this Ethanol? Can the sell it in open market or it has to sold to Oil marketing companies for compulsory blending?


(Mridul) #1192

Cogen - The exact number will depend on the fiber content in the sugarcane. If the fiber content in sugarcane is lower the Bagasse availability and hence the cogeneration will be lesser, but if the Bagasse content in the sugar is higher obviously the cogeneration will be more.

Distillery - Two markets. 1. Potable alcohol 2. Fuel blending. These days, more high end whiskey manufactures are moving towards grain alcohol. Molasses were earlier being supplied to liquor companies but now trend is changing. Government’s blending target is ~ 5%-10% which is resulting in good demand for ethanol (ethyl alcohol). Ethyl alcohol or Ethanol is the only potable alcohol.

Oil Marketing Companies agree to blend when crude is higher. Earlier, the problem was that ethanol demand was not fulfilled when needed due to inconsistency in production numbers. But now government wants to reduce fuel imports big time and is very serious on this blending front. So, Ethanol should do well and should come for rescue of sugar companies amid mess around sugar pricing.

One can check Dwarikesh’s last concall to understand the price dynamics.


(Aditya Mehta) #1193

THE END!! (most prob.)


(Gaurav Agarwal) #1194

There seems to be a short supply of ethanol for blending with Petrol. Why cann’t Sugar companies produce more ethanol instead of sugar to balance demand-supply dynamics?


(Gaurav Agarwal) #1195

Sugar Mills can be designed to switch between Sugar & Ethanol production depending on market requirement.

Source - Agricultural and Food Policy Center The Texas A&M University System


(Aditya Mehta) #1196

I doubt if this may lead to any rerating.
Any views?

https://www.indiatoday.in/pti-feed/story/govt-pegs-sugar-output-at-27.2-mn-tn-for-2017-18-1188822-2018-03-13


(Gaurav Agarwal) #1197

(Mridul) #1198

Things still not clear as to how this export policy is going to be implemented. They said they will force mills to export but will that export be subsidized? If yes, where will the government bring in money? Will they impose any sort of tax on mills or this will be borne by domestic consumer?

One more important thing as per above article is that most of the sugar produced is refined, though global market requires raw sugar. So, as per industry sourced, export target would be difficult to attain.


(Aditya Mehta) #1199

One more thing though they can jack up prices by exports, but the case is still these companies will not be making supernormal profits this time.
I don’t think sugar millgate prices can go upto Rs.37-39/kg again like last year.


(Jiten Parmar) #1200

Yes. I have twitted many times and also commented in cyclical/commodity thread regarding sugar. I was out of it long back. That cycle played out perfectly for me. Couldn’t have asked for more.


(sta) #1201

@jitenp Sir how did you manage to enter at the right time? What parameters were you following?


(phreak) #1202

Sugar supply glut in India and Thailand has spooked international markets. Clearly the subsidy to sugar has played havoc with the supply side of things. Amazing what a lopsided policy move in one Indian state can do to international prices of a commodity.


(Jiten Parmar) #1203

It’s explained in the presentation. What were the triggers for entering.

Exit was also very simple. Bumper production. I keep investing simple. Watching supply is the key. And the difference between demand and supply.


(mp bajaj) #1204

Please give the link for presentation


(Jiten Parmar) #1205

just search for “Commodity and Cyclical plays”


(aerofire) #1206

Export Duty Cut by 20% will give a short term technical pull back.


(Gaurav Agarwal) #1209

(Mridul) #1210

It wd come around 55 paise per kg of sugar. Would it matter much? This ain’t the solution. If we need to.improve the health of indian sugar chain, we must let it governed by market dynamics…natural demand and supply. Msp must be reasonable! Due to msp, we are far from competitive in global market.

Populist move!


(phreak) #1211

I was looking at Dwarikesh Sugar just now

  1. FY17 Debt was 460 Cr but in HY18, the debt was down to a mere 70 Cr. The great cashflows in FY17 and HY18 itself has been able to reduce debt quite a bit.

  2. Book value is close to 19 and current price about 25.

  3. P/E is around 3. Of course we are at peak earnings. But consider this - Their FCF for FY17 is about 160 Cr. For FY18, it could be around the same, maybe a bit higher. So in two years, they have generated a FCF of about 320 Cr! (Market cap 480 Cr) Now if you see the previous years, other than FY15, they have generated positive cash flow even on years where there was a down cycle.

  4. This is the interest outgo in the last 6 years

78.86 -> 70.56 -> 75.21 -> 51.59 -> 41.94 -> 27.86 (TTM)

This is going to probably decrease further post FY18.

  1. D/E was 1.76 as of FY17 but was 0.2 as of HY18. I assume it will go up when working capital loans go up during procuring season (not sure).

  2. Has paid good dividend (around 4%)

At a good discount to book value (maybe sometime in the near future) - say at around 15-17 levels if it gets there, this could be a decent investment and I see that the balance sheet hasn’t been this good for this company at any point of time as it seems to have slimmed it down to 2006 levels as of HY18.

Disc: Tracking


(Mridul) #1212

Few good years in cyclicals can turnaround BS completely. Same story in metals, other sugar companies like balrampur, dhampur. Though, 4-5 yrs of downcycle hits them hard. I bliv there will be some respite due to cogen and ethanol for many players.