Sugar stocks have been one of the worst performers this week. Some stocks such as Bajaj Hindusthan and Balrampur Chini have dropped by over 10 per cent in the last three trading sessions. Since the beginning of the year, sugar stocks have underperformed the Sensex and the Nifty, dropping 20 per cent.
The fall in these stocks shouldn't come as a surprise. It was expected, particularly in the background of sugar prices rising to over Rs 40 a kg without any fundamental reasons. When sugar prices began to gain, stocks of companies in the sector too began to rise. But as the prices dropped, the stocks have followed suit. In the domestic market, prices have been on the downswing since the third week of January and since February 1, the market has seen about 30 per cent fall in the prices. The global market too witnessed a similar fall during the period.
On Thursday, white sugar in London was quoted at $547 a tonne against a peak of $767 seen at the beginning of the year. Raw sugar prices, too, have tumbled below 20 cents a pound. For traders, it would be a safe bet to keep off from these counters for now.
Here's why
The primary reason for sugar prices to surge was that the production this season (October 2009-September 2010) was expected to be 15-16 million tonnes (mt) against 15 mt last season. The Indian Sugar Mills Association on Tuesday said the production may be higher at 16.8 mt compared with the initial estimates.
Farms in western Uttar Pradesh still abound with sugarcane. That will mean production in the State, the country's highest producer, will be more by at least 1 mt. Also, farmers are reporting yields that are at least 23 tonnes higher per hectare. Besides, this season at least 7 mt of sugar was expected to be imported, while opening stocks are estimated at 3.7 mt. On the demand side, the domestic consumption is seen unchanged at 22 mt.
This means supply will easily outstrip the demand. However, it is unlikely to be that way as imports could now be lower. Already, the global trade is under pressure with many buyers trying to rework the deals in the face of declining prices.
Adding to the pressure on the market is Brazil's production doubling in February in the Centre-South, the largest growing region in the world.
No taste for sugar
A report by Kingsman said buyers are keeping away from buying sugar in the falling market. Besides this, large global funds have all begun to sell their holdings in sugar, making the scenario totally bearish.
On the revenue outgo side, mills are still having to pay a higher price for the cane. For instance, in Uttar Pradesh they are still paying Rs 261 a quintal for cane. In other States, the mills pay farmers anything over Rs 200 a quintal for the cane.
In Maharashtra, a tug-of-war has broken out between the mills and traders in view of the falling prices. The mills are not ready to sell sugar below Rs 3,200 a quintal. Besides the realisation from sugar, mills also get revenue from molasses and bagasse. But these incomes are seen as a cushion against the fall in sugar prices.
There are also reports that some smart operators who had stocked up on sugar when it was ruling at around Rs 15 a kg are now offering the commodity at less than Rs 30 a kg.
All this means sugar companies are likely to be under tremendous pressure. The current quarter could see a drop in the mills' profits.
What is perceived is that sugar companies could now be just profit-making units rather than ones making super-profits.
In these circumstances, it is most likely that sugar stocks will be totally in a bear grip Any recovery in the prices will be short-lived with global funds taking the opportunity to bail out. That will hold true for the stocks too.
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