The sugar sector has staged some comeback after being drubbed in the stock market for the last many weeks. In fact, it has been one of the biggest underperformers but sugar stocks have been trying to stage a comeback over the last few days.
What has changed in the global and local sugar environment to warrant such pessimism?
Sudhakshina Unnikrishnan of Barclays Capital believes that global supplies and high production will keep sugar prices subdued. According to her, there has been a price correction of around 25% in six months.
Sudhakshina Unnikrishnan sees global sugar prices bottoming out at 14 cents. She expects crude oil prices to be supportive for sugar. She feels that product revenues could offset sugar margin losses.
Vivek Saraogi of Balrampur Chini doesn't expect much government interference in sugar prices. Saraogi believes that the government is likely to free exports from October. Indian producers may see margin reduction going forward, he adds.
Excerpts from CNBC-TV18's exclusive interview with Vivek Saraogi and Sudakshina Unnikrishnan:
There is such an air of pessimism about sugar sector right now in the market. When you look at the global sugar prices and the way they are softening up, do you feel more apprehensive or pessimistic than you were feeling at this point last year?
Saraogi: With oil prices moving the way they are, I am not at all pessimistic on global sugar prices. It has corrected in line with other commodity corrections. I see it come back.
Our range for raw sugar, after talks with a lot of international trade houses, was around 15-18 cents, it is around 14.5 cents now. Our range is flat on the local prices. With our quarterly results, we expect a realisation of around Rs 18 this year.
What is your observation on how sugar prices have moved recently in the global market; do you expect them to soften up further?
Unnikrishnan: We definitely do not expect prices to soften further from current levels. Correction has actually been quite steep over the last few months. We do not expect prices to retrace the 19-20 cents level over the near term and the reason for this is that there has been a lot of global supplies coming on board.
We see rebounding in supply from Thailand; we see strong production from India and possible exports into the global markets. We are also seeing strong and a possible record crop from Brazil. All this in tandem would suggest that prices will not go lower from current levels. But we do not expect them to rally for this reason.
You mentioned about India's increase in production but how much of that would hit the export market? How much of a role would Indian sugar have to play?
Unnikrishnan: I think it is definitely a policy issue as to when and if these Indian sugar exports were to take place. But if they do take place, they will affect prices and there will be a downward pressure on prices. Over the last two years, the fall in Indian supply and the global ending stocks of sugar have been supportive for the rally in sugar prices.
If we do see India exporting and if we see more supply coming on a global level, then definitely this will be putting a downward pressure on prices.
What is the local outlook because there are some straws of concern, which are blowing not only on where sugar prices could be but also in what the government is saying? It has been a 'sometimes on and sometimes-off' kind of policy, 'exports on and exports off'. Are you getting any sense that the government is trying to cool down prices or interfere in your market?
Saraogi: What happened now was that this price rise has become a national issue. Sugar industry got caught in a cross fire, if I may suggest, without sugar being the focal point of that discussion.
Basically it is a part of the WPI (Wholesale Price Index) and because of oil-led inflation, sugar got caught in the whole discussion. Don't think that the government's view is negative. I don't think the government would like to interfere.
Soon after this temporary ban on sugar exports, the government went on record, Sharad Pawar said that come October 1, and come the time when we have our estimates for next year ready, which is already floating around 22.5
However, as of now, the policy says that one cannot export. There has been some waver given to that July 22 mark but that is for the past. We do not have too much stocks going up to October.
So I don't fear anything up to October. From October onwards, we feel pretty certain that the government will free up exports. So on the local front, I don't see any problem.
Staying with the domestic scenario for 2006-07, you have got an SMP of about Rs 80.25 per quintal. Was that in line with your expectation?
Saraogi: For producers in UP, SMP has lost bearing because SMP does not have any bearing on our cane price, which is now the state advised cane price as per law. That is a move, which would affect the other states and not UP.
There has been some concern that higher cane prices could actually put a lot of pressure on particularly the North Indian sugar manufacturers. Is that a legitimate concern this year?
Saraogi: I would say that there would be a bit of reduction in margin between the cost price and selling price of sugar because we are assuming a flat price. I am being realistic and assuming a flat price. We are expecting 6-7% rise in cane price. Both these put together, could shave off a rupee on the maximum from the margin.
Having said that, we are very confident of increasing volumes. Balrampur feels very confident of increasing its volumes. We feel confident of increasing our recoveries and most importantly, we are very bullish on the co-product sector, which is power and ethanol, we don't call it a bi-product because it has a lot more bearing now.
Put in perspective, how much sugar has corrected internationally. We keep hearing various figures but from their recent peaks, how much have prices cooled off?
Unnikrishnan: Prices peaked over 19 cents in February and they have fallen to in the mid ranges of 14 cents as of yesterday's close. So we have seen a hefty correction over the last few months.
From 19 to 14 cents; do you believe that we are somewhere close to the intermediate bottom?
Unnikrishnan: I think 14 cents is the near term bottom. I do not see prices going much lower than that specially looking at the fact that crude oil prices are currently at record highs. This is supporting sugar prices of late and I do not think this is a sort of macro-environment that will allow sugar prices to fall even lower.
Crude is still at $77. Do you see any positive rub-off coming through to this sector because of more move towards ethanol because crude is refusing to cool down?
Unnikrishnan: We should have seen a stronger link that we have seen at the end of last year and early this year. But the relationship appears to have weakened of late between crude oil, ethanol and sugar prices.
But we would definitely expect high record crude oil prices to be supportive for sugar prices if not directly propping them up higher. So with crude oil prices at this level, we will not see steep to downward correction in sugar prices from current levels.
What kind of performance will you be able to report in the next four quarters given your expectation of flat sugar prices and somewhat depressed margins. Would it be very much off the mark or would volumes take care of this margin compression?
Saraogi: I would say that there would be volume growth and growth from the power sector. Higher production has given us higher availability of bagasse and molasses, so that would run the bi-product. There will be higher volumes with new units coming in and old units performing better and having higher cane units. All of those could actually protect our estimates.
What kind of growth would you be looking at then?
Saraogi: It is impossible to give figures, because it moves on quarter-to-quarter and on cane pricing. But I don't know what estimate people had for the first quarter. I don't know what they have for the rest of the year but by and large, from whatever I have heard, it will be almost in line with expectations.
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