Expect a sugar shocker in days to come.

Less rains spell a price bounty

Expect a sugar shocker in days to come. Well, the prices may not be as sweetening as the commodity itself. Food minister KV Thomas revealed as much when he said the output for the next marketing year (October to September 2012-13) is likely to be 23 million tonnes (mt) as against 26 mt in the previous year.
While analysts had been expecting a lower production all this while, the number is way less, considering the Indian Sugar Mill’s Association had pegged it at 25 mt a few weeks ago. The estimated shortfall is attributed to below-par monsoon rains in the sugar-growing belt of Karnataka and Maharashtra. There is also a seasonality element at work. The other worrying aspect is this time around, local sugar prices have moved faster than the global level.
Initial reports indicate that Brazil, the largest exporter of sugar, is expected to produce less. Sugar surplus, which was earlier projected at around 8-10 mt, is now likely to come in at around 5-6 mt. For India, with a consumption of around 22 mt, this year’s production as well as higher exports will mean lower inventory. Both domestic and global developments point to a supply crunch, which can push prices up.
One company in the sugar space that’s worth a look is Balrampur Chini. For every rupee rise in the price, the company’s earning per share increases by around `2.5. Apart from being the largest sugar company in the country with a production capacity of 7 lakh tonnes, a big positive for this company is it’s located in Uttar Pradesh, which has not been affected as much as Maharashtra and Karnataka. In other words, Balrampur Chini stands to gain handsomely from the rise in prices on account of lower supply.
Over the past two months, share price of Balrampur Chini has moved up from `48 to a high of `69, but has since corrected to `64. The expected weakness in the market can bring the prices down to `62 which can be a good entry point. With sugar prices unlikely to come down anytime soon, Balrampur Chini can post decent growth, going forward.