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Sugar Rally May Help India’s Top Refiner Revive Profit

Shree Renuka Sugars Ltd. (SHRS), India’s top refiner, forecasts a drop in output will propel domestic prices of the sweetener to a three-year high by January and help the company stem four straight quarters of declining profit.

Prices may surge as much as 19 percent to 40 rupees a kilogram (77 cents) at the factory gate by January, the highest level since January 2010, from 33.5 rupees as India’s production drops and demand climbs, said Managing Director Narendra Murkumbi. The increase in prices will help Shree Renuka, which also owns mills in Brazil, counter a rise in cane costs and drop in production, he said.

Output in the world’s second-largest producer of sugar is set to decline for the first time in four years, said Food Minister K.V. Thomas. That has helped boost shares at refiners including Bajaj Hindusthan Ltd. (BJH), Balrampur Chini Mills Ltd. (BRCM) and Shree Renuka. The company may report a group profit of 2 billion rupees in the year ending March 31, according to a median estimate of 11 analysts compiled by Bloomberg.

“Domestic prices will rise sharply in the next few months,” Murkumbi said. Margins at our Indian operations “will be higher because of higher prices. Supply for 2013-2014 is very uncertain and we’ll have two tight years.”

Sugar production in India, the world’s biggest consumer, is set to decline to 23 million tons in the year that began on Oct. 1, the lowest since 2010-2011, Food Minister Thomas said on Oct. 3. Demand may total 22 million tons, he said.

Yield Worries

Shree Renuka’s shares have jumped 42 percent in Mumbai this year, while Balrampur Chini has doubled in the period. Shree Renuka rose 2.4 percent to close at 35.65 rupees today.

The rally in local prices and concerns about lower cane yields in Maharashtra and Karnataka states, the biggest and third-largest producers, have halted exports and made imports viable, Murkumbi said. Shree Renuka’s cane crushing will drop 20 percent this year as dry weather in areas where its mills are located cuts output.

“Prices in India will rise from now onward as stockpile with traders and retailers is very tight,” Sanjay Manyal, an analyst with ICICIdirect.com., said by phone from Mumbai. “Higher domestic prices will help the company boost profitability.”

Shree Renuka’s net income from its Indian business dropped 72 percent in the quarter ended June 30 to 133 million rupees from 472 million rupees a year earlier. The company reported a loss of 719 million rupees in the three months ended March 31 after including its Brazilian operations. It hasn’t released group earnings data for June.

Refining Margins

Balrampur, Bajaj and other mills based in the northern Indian state of Uttar Pradesh, the biggest cane grower, will benefit more from the price rally as their sales may increase because of a jump in cane harvest, Manyal said. The state’s sugar output may increase 11 percent to as much as 7.8 million tons in 2012-2013, C.B. Patodia, president of the Uttar Pradesh Sugar Mills Association, said on Sept. 7.

Shree Renuka plans to boost processing of imported raw sugar at its port-based refineries to export to countries in Asia, Murkumbi said. The company’s refineries near Kandla and Haldia ports have a capacity to process 1.7 million tons of raw sugar. Shree Renuka mainly processes duty-free imported raw sugar for resale overseas.

“At the moment we are concentrating on exports as our margin from re-export is higher at both our refineries,” Murkumbi said. “In the export market we see very little competition now because Indian sugar is not being offered yet. And Thai sugar will not be available before January and in the Asian market there is good demand for our white sugar.”

Scrap Duty

The Asian sugar market will probably swing to a deficit in 2012-2013 as dry weather cuts the harvest in India, Green Pool Commodity Specialists Pty said last month. The deficit may total about 900,000 tons from a surplus of 580,000 tons in 2011-2012, according to Tom McNeill, a director at the Brisbane, Australia- based researcher.

Refining will be profitable as long as the premium for white sugar over raw stays above $100, ICICIdirect.com’s Manyal said. Refined sugar fetches a premium of $109.6 a ton over raw sugar, up 24 percent this year, data compiled by Bloomberg show.

India should scrap a duty on imports of the raw variety to boost supplies after cane crushing is over in Maharashtra by end of January to help refineries utilize capacity and boost local supplies, Murkumbi said.

“We have surplus during the season and if India is flexible it can export during the season and import after the crushing season gets over,” Murkumbi said. “That allows market forces to adjust demand and supply without needing any government intervention.”

Brazil Sugar

India has bought 450,000 tons of raw sugar from Brazil, according to Marex Spectron Group in London. The sweetener can be refined and re-exported as well as consumed in India after a 10 percent duty is paid, Paul Bannister, head of sugar brokerage at the company in London said in a weekly report dated Oct. 1.

“If the government removes the import duty on raw sugar it will majorly benefit Shree Renuka,” ICICIdirect.com’s Manyal said. “The government will likely scrap the duty on an expected shortfall in production.”

Shree Renuka may need to pay 20 percent more to farmers to secure cane this year, Murkumbi said. Cane prices may climb to 3,000 rupees a ton from an average 2,500 rupees in 2011-2012, he said.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net;

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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