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


([email protected]) #1213

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 - ‘Commodity and cyclical play’ 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.


(phreak) #1214

I agree that down years are going to be bad. I am trying to figure out “how bad”, 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. Let’s wait for a few months and see because a bottom is coming by then. I don’t 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 don’t 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.


(Mridul) #1215

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.


(Mehnazfatima) #1216

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


(Gaurav Agarwal) #1217

The above two figures are from Dalmia Bharat Sugar Q3FY18 results. According to these the company has sugar revenue of 543 crores for sales of 137,000 tonnes sugar. Therefore sales price comes to 39.6 per kilogram. This seems unrealistic given the average spot price of Oct, Nov, Dec 2017 period was Rs. 34/kg.

I will thankful if someone can explain this discrepancy?


(amit maheshwari) #1218

This is because of inter segment revenue. Sale of Bagasse & Molasses to Cogen and Distillery respectively is counted in sugar segment revenue. Similarly sale of power to sugar plant is counted in Power segment revenue. You would see that inter segment revenue are excluded in the end.


(Gaurav Agarwal) #1219

Thanks for reply. So, from above numbers it is impossible to ascertain the sale price per kilogram of sugar.


(Mridul) #1220

Such a flawed model. Government implementing MSP, don’t want cane arrears to go up, not giving export subsidies, but forcing mills to pay to farmers in 15 days and do their export quota! Only way this chain can remain healthy is by deregulating sugarcane prices. Sugar prices are expected to fall more this month.


(Raghu) #1221

Just in a matter of 6 months, the leader stocks dhampur/balrapur have gone such a downhill. Dhampur almost is back to sub 100 levels from 300 plus.
Those who wanted to have a quick gains of 10 to 20 percent and enter at the top of the cycle have eroded their capital in such a short time. Now the wait for next upcycle is far-far away.
I saw Anil Kumar Goel holds almost 500 cr worth investment in Sugar? what was his thought process behind? May be he thought THIS TIME ITS DIFFERENT?
I followed this sugar cycle from the past one and half year and made some decent profit by following advices of senior boarders like Mehnaz/Jiten(very great full for them). Existed stock like Ugar when my friends were advising it will reach 100.
I keep coming back to this thread because i dont want to miss the next cycle. I want to understand few commodity cycles and want to benefit from it. Right now, am invested in metal stocks like Hind Copper. Can anybody advice on whats the best allocation for commodity stocks in your folio…


(GSrikan) #1222

This time it could be really different (and may be not):

  1. the change in cane variety to short term, high yield one is one change from current cycle to all previous ones. This is allowing the Mills about 40-50 extra crushing days (150 to now 200 crushing days). Without investing single rupee, the crushing capacity has gone up by 33%.

  2. the high yielding variety has improved sugar realization too. Without having to pay any more money to farmer (in UP only) the companies are realizing 50% extra sugar due to improved realization from 9% to 13%. This drives down per kg sugar cost.

  3. the extra sugar this year is only 4.5mt (excluding carry forward inventory). This could be gotten rid of in many ways, if govt has will, which so far did not take concrete action. a) talk to Bangladesh n Sri Lanka which are net importers and export excess sugar to them at losses by giving forced export quota to each mill. b) use the law to fix min sugar selling price of 34 rs.
    c) this is easier but can not be implemented this year. Use of b-heavy molasses for generating ethonol, thus getting rid of excess sugar. The Mills did not anticipate sugar price fall this year. If they had anticipated they probably would have implemented this as much as they could. Still, I believe the Mills with good distillery capacity might already be doing it starting from this quarter. Brazil uses sugar juice directly to produce ethonol. They are planning to increase the ethanol produced from sugar cane juice as sugar prices are not remunerative. The ethonol blending can go up to 25% (even more too). The current distillation capacity supports only 5% blending. The companies now have to come up with more distillation capacity and start producing ethonol from sugar cane juice/b heavy molasses when they predict excess sugar production.

  4. the rise in oil prices (got to see how long they last) would help better realization of ethonol (hope govt increases ethonol buy price now).

  5. the world is facing threat of water shortage. Sugar production will not be growing as fast as it happened earlier. This is a threat to our Mills too. But I feel, UP based companies might be in good steady for next 10 yrs. There is a famous investor who is buying badam farms because, they are water guzzling like sugar cane and there will be badam shortage in future due to water shortage. It applies to sugar too.

  6. the arrears to farmers seem to have built up rapidly to 20k crore. If govt wants to win next election, they have to get the farmers paid. The sane govt would make Mills profitable to clear the arrears. An insane govt would force the Mills to pay the farmers even though they are bleeding.

All said and done there are too many variables at play here.

Disc: I am new to investing and don’t have much knowledge about sugar industry either. These are just some thoughts. Invested small money in dhampur @200 and can wait until it gets wiped out or until there is a real turn around.


(Gaurav Agarwal) #1223

Has any company reported 13% recovery?


(GSrikan) #1224

My mistake. It is about 11%+ for dhampur as per last concall. As the newer vareity gets adopted more and more the recovery % would keep increasing. Just searched Google and came across following article.


(Rajesh) #1225

Sir ji,
This is old technology now. I am sugarcane farmer. In UP no body is cultivating old varieties. This theme is played out already. Also new sowing technology has increased the yeild from 250 quintal to 360 quintal per acre.


(Gaurav Agarwal) #1226

Hi @Rajesh1975

Do you have estimate of sugarcane production for this year? According to Govt. it should be around 353 million tons. But some people doubt this number.

Thanks


(Rajesh) #1227

Difficult to estimate. I know the sown area in up is more. Yeild varies too much like sowing time, monsoon etc. So difficult to estimate for all agencies.


(Gaurav Agarwal) #1228

(vkagrawal) #1229

@Gaurav_Agarwal
Thanks for sharing the news. I have just started understanding the sugar commodity cycle & it effects on share prices.
As of now the above news indicates that Sugar Mills are having Production cost of Rs.36 per KG. Do you have any historical data/news post which can give some sort of production cost in various years.?
I am just trying to understand the estimated loss per KG in various production quantity.
What do you feel how many years it would take (considering the normal monsoon each year) demand would match the production?


(Gaurav Agarwal) #1230

The best source to know the production cost will quarterly press brief or annual report by the companies, news items are news item.

It is very difficult to estimate the time period for demand-production match but cane arrears are too high and I think this cannot go on for very long.


(vipinsays) #1231

If you can throw some light on- How new ethanol blending percentage will play out on sugar Mills?Bajaj hind and renuka got highest capacity


(khushi) #1232

But both are highly debt ladden.