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
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I doubt if this may lead to any rerating.
Any views?
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.
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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 donât think sugar millgate prices can go upto Rs.37-39/kg again like last year.
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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. Couldnât have asked for more.
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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.
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Itâs 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.
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Please give the link for presentation
just search for âCommodity and Cyclical playsâ
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Export Duty Cut by 20% will give a short term technical pull back.
It wd come around 55 paise per kg of sugar. Would it matter much? This ainât the solution. If we need to.improve the health of indian sugar chain, we must let it governed by market dynamicsâŚnatural demand and supply. Msp must be reasonable! Due to msp, we are far from competitive in global market.
Populist move!
I was looking at Dwarikesh Sugar just now
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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.
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Book value is close to 19 and current price about 25.
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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.
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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.
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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).
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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 hasnât 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
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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.
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hi @phreakv6 with my limited knowledge on cyclical play, would it still be wise to invest in sugar stocks keeping the demand - supply in mind as the current situation is tilted towards more supply.
I had gone through the thread - âCommodity and cyclical playâ what I can infer from that is, an investment into cyclical would be more beneficial when the entry is made a distress situation of the cycle, which is not the case with the sugar sector at this point in time.
Your thoughts would be helpful.
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I agree that down years are going to be bad. I am trying to figure out âhow badâ, based on current balance sheet and comparing it with the past. At current EV of about 550 Cr (based of HY18 balance sheet and current market price) and FCF of current and last year and FCF of previous 8 years (which should hopefully cover the full cycle), I think we may have to rethink the bottom. My gut feel says things are not going to be as bad as they were for this sector few years back and the valuation bottom would move up. Letâs wait for a few months and see because a bottom is coming by then. I donât know how the capex cycle works in this sector though. That could put a spanner in the works. However, the ones that have reduced debt drastically and can manage a 8-10% OPM in down years might survive a lot better.
At this point, it is perhaps too early to consider this sector again although there has been a pretty big correction. I donât think we are done with correction yet but at some point these are going to get quite attractive and we need to figure out which of the sugar stocks have managed their balance sheets better. Some of them which posted losses in the past during down years may not post losses going forward if their interest payments have drastically reduced. These stocks might correct less than the others. Again, at this point I am just tracking this sector see how it is faring so its far too early to consider positions.
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In my opinion what matters with sugar sector the most is supply and demand metric. With demand around 25 mt and supply around 29-30, things are going to go downhill. Sugar consumption growth is 5-6% pa, so i think it is going to take 3-4 years to balance things out once again.
Couple of things that can change this calculation - low cane production due to poor monsoon, lower msp, lower crop area under cultivation, lower yields. One and three have high probability.
Though, one thing that has changed this time is cogen and ethanol, which is going to provide stability to integrated businesses like dcm, dhampur, balrampur, and dwarikesh (next yr).
Import export duties have minimal effect as we are nit competitive internationally due to high msp.
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Sugar consumption in India is growing by 0.5 million tons per annum. Therefore, it will take maybe 6 years or more for the consumption to rise to 29 million tons
Secondly, sugarcane is the sturdiest and the most remunerative crop for farmers. This there appears to be very little possibility of farmers moving away from sugarcane in the near future.
This time there was an upcycle in sugar
sector due to two consecutive years of drought. Even a single year of drought is not enough to cause a fall in sugarcane cultivation. And as per metrological reports, India may have a normal monsoon next year and as per the sowing data, the sugar production in the next sugar season will be above 30 million tons and that will ensure continued bad times for the sugar sector till September 2019 at least.
In the last down cycle, companies like Dhampur and Balrampur paid dividend for four out of six years of excess production BUT still the stockprice continued to linger around 30-50 for these stocks. In the coming downcycle too, all the sugar stocks may languish at lower level for next few years
In face of all of the above, I think investors should stay away from sugar stocks for the next 3-4 years
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