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 , itās 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.
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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.
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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 . Hereās the link . Itās mentioned in the article.
- Increasing recoveries, debt thatās 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 hasnāt worked out well for anyone. Not for the millers(huge losses), not for the farmers (increasing arrears), not for banks (high NPAās) 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