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Is sugar getting too sweet?

India is the largest consumer and the second largest producer of sugar (refer my post on Sugar Industry in India: Basics) in the world. Output of sugar in India does have an impact on the global sugar market. For the sugar year October 2009 to September 2010, demand was expected at 23 million tonnes compared to production expectation of 16 million tonnes together with carry-in stocks of 3 million tonnes. The expectation of a huge demand-supply mismatch resulted in prices rising sharply right from the beginning of the sugar year.

The government undertook a number of steps to curb the rising prices. These include:

• Allowing duty free import of both white and raw sugar by the mills and traders
• Banning futures
• Increasing levy quota from 10% to 20%
• Enforcing weekly release quota instead of monthly
• Extention of sugar imports till January 2011.
• Raising fair and remunerative prices (FRP) proclaiming that farmers needed higher prices for lower sugarcane output

While these measures were undertaken by the government, sugar availability in India improved sharply. This was mainly steered by a sharp rise in domestic production in Uttar Pradesh, Maharashtra and Karnataka because of higher cane availability. Unexpected rainfall during November-December 2009, led to an improvement in the yield and output of sugarcane.
Sugar mills and private traders have contracted to import 31 lakh tonnes of sugar during 1 October 2009-25 March 2010 according to a senior Food Ministry official. Of this, around 27 lakh tonnes of sugar has already arrived in the country. This means that the industry has enough sugar to meet the demand during the current sugar year.

An improvement in India’s sugar output and the expectations of the country not importing significant chunk of sugar in the coming months have led to a steep fall in sugar prices in the London market.

So what would be the impact on domestic sugar companies?

A fall in prices will result in lower unit realisations, which will dampen revenue earned from sale of sugar. A likely pick-up in the sugarcane crushing activity is expected to increase the availability of by-products and, hence, the companies are expected to grow their revenues from the distillery and power co-generation business. Profit margins of the sugar companies are expected to contract. This is because prices paid by mills to farmers for procurement of sugarcane are unlikely to reduce in proportion to the fall in sugar prices.

Taking advantage of the downtrend in the sugar cycle, EID Parry — part of the Murugappa Group — has offered to acquire up to 39.92 lakh GMR Industries equity shares of face value of Rs 10 each, which is in aggregate 20% of its fully paid up equity share capital, for Rs 110.69 each. This equals an investment of Rs 44.19 crore. GMR Industries owns and operates three fully integrated sugar complexes in Andhra Pradesh and Karnataka. The deal would mark EID Parry’s entry into Andhra Pradesh and also consoli-date its position as a leading sugar manufacturer in Karnataka.

Does this mean that the industry is moving towards consolidation?

A downfall in any cycle is marked by lower prices resulting in lower valuation and consequently lower asset prices. This deal may be a start towards consolidation in the industry.

Categories: Sugar

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