A farmer works in his sugarcane field
Goods news has started pouring in for sugar players following recent rains in south India, especially Tamil Nadu.
In calendar year 2017, unlike Karnataka and Andhra Pradesh, Tamil Nadu had seen below-normal rains in July-August. This had impacted sugar firms, including EID-Parry that has nearly half of its capacities in the state. An improved rainfall bodes well for the sugarcane crop and should improve cane availability for crushing.
The below-normal rains had impact EID’s September quarter (Q2) performance, too. Even though some respite came from raw sugar imports and EID sourced external molasses for its distillery operations, the profitability suffered.
The EID stock has been an outperformer in the past three months — up 18 per cent versus a 6.6 per cent uptick in the broader Sensex.
As cane availability improves, EID may also benefit from completion of de-bottlenecking of all its mills in Karnataka and Tamil Nadu as these are ready for production, said analysts at JM Financial.
Analysts also see benefits accruing from an improved performance of EID’s bio-products business.
Axis Capital expects a 13-14 per cent decline in cane crushed for EID in FY18, against a 46 per cent fall in cane availability in Q2.
Better cane availability and reducing holding company discounts for Coromandel International (where EID holds a 61 per cent stake) are seen driving upside for the stock, even as realisations may not improve from here on.
Analysts at Axis Capital, who remain bullish on EID, say even as the sugar business suffers intermittently, their continued confidence in the company emanates from the underlying strength in Coromandel that has strong structural tailwinds and can return 50 per cent over a three-year horizon.
While attributing 20 per cent holding company discount, Axis Capital arrives at a target price of Rs 520, while JM Financial (attributing 50 per cent holding company discount) has pegged it at Rs 410 for the EID stock, which trades at the Rs 371-level.
India’s sugar production in the current sugar year (October 2017-September 2018) is estimated to increased to 25.1 million tonnes (mt) from 20.3 mt in the previous sugar year, meeting a demand of around 25 mt. Such a scenario may cap any gains in sugar prices from here on. With prices expected to be range-bound across regions, most sugar players may at best continue reporting a stable performance aided by volumes.
Among the few triggers for sugar companies
could be higher ethanol demand, which could boost their revenues from the distillery segment, besides reforms on linking of sugarcane procurement price with sugar prices, increase in sugar exports and a favourable change in stock holding limits.