Modi Helps Debt-Laden India Sugar Shares Become Top Gainers

  • Mumbai sugar prices have rallied 26 percent since end-June
  • That may help sugar mills cut losses and return to profit

Shares in India’s sugar mills are surging as Prime Minister Narendra Modi’s push for exports of the sweetener helps lift the gloom around an industry saddled with almost $8 billion of debt.

The government in September ordered compulsory overseas shipments, which together with a looming global deficit may push up domestic sugar prices for a fourth month in October. That could trim losses at mills and eventually bring some back to profit in the 2016-17 season if the trend continues, according to processor Sakthi Sugars Ltd.

Indian mills are being squeezed by rising payments to farmers -- cane rates are set by local officials partly to woo votes -- and prices that remain too low to cover costs. The recent climb in the sweetener’s price has stirred speculation of an improving outlook, making sugar shares such as Dhampur Sugar Mills Ltd. and Shree Renuka Sugars Ltd. this month’s top performers in India’s S&P BSE Fast Moving Consumer Goods index.

“I think we’re very much on the right track” to revive the industry, Tarun Sawhney, vice chairman of Triveni Engineering & Industries Ltd., India’s third-largest producer, said in an interview. “There’s definitely light at the end of the tunnel. We’re moving towards it.”

Modi's push for exports has helped
Modi's push for exports has helped

Dhampur Sugar Mills is up about 86 percent this month, Shree Renuka 63 percent and Bajaj Hindusthan Sugar Ltd. 48 percent. EID Parry India Ltd. has advanced 34 percent and Triveni 17 percent in the period.

A number of sugar stocks rose today. Sakthi Sugars rose 3.7 percent, Bajaj Hindusthan Sugar climbed 2.2 percent and Balrampur Chini Mills Ltd. 1.1 percent.

Sugar prices in Mumbai have surged 26 percent since the end of June, after the government granted interest-free loans to mills and offered a subsidy on raw sugar exports. India also scrapped a 12.5 percent excise duty on ethanol to promote the sale of blended fuel and improve the cash flow of sugar producers. The goal is to enable them to clear money owed to the nation’s 50 million cane growers.

While export subsidies of as much as 4,000 rupees a ton in the past two years failed to boost shipments significantly because of a global glut, the plan to make overseas sales mandatory seems to be working. Exports of 4 million tons ordered by the government in September will drain about 15 percent of the 2015-16 estimated output. That will help shrink stockpiles seen at 9.6 million tons in the beginning of this month.

“When the excess stocks go out, there will be balance in the system and that will be better for prices,” said M. Manickam, executive chairman of Sakthi Sugars. “Structurally, we should be fine by end of this year and possibly profitable in the 2016-17 season.”

Sugar Rally

Sugar prices in Mumbai have jumped 9.5 percent in October to 2,759 rupees per 100 kilograms after rallying 15 percent in the previous three months. That’s come alongside the biggest monthly gain in prices in five years on ICE Futures U.S. in September, improving India’s export prospects.

“Mandatory exports will boost local prices and help companies make money, and if subsidies are announced later that will be an additional kicker and bonus for the mills,” said Rohit Agarwal, an analyst with SPA Securities Ltd. in Kolkata, who has a buy rating on Balrampur Chini Mills.

The government is planning to subsidize compulsory exports by paying farmers some of the money they are owed from the mills, people familiar with the matter said in August, asking not to be identified as the proposal hadn’t yet been implemented.

Risks remain in the industry: mills are still losing as much as 5 rupees a kilogram on local sugar sales after paying record cane prices. They have piled up debt of about 510 billion rupees ($7.9 billion), according to Triveni’s Sawhney.

Top producers such as Bajaj Hindusthan, Balrampur Chini and Triveni Engineering posted losses in a number of recent quarters. The rally in their shares may not be sustainable since there’s still a domestic surplus, according to Achal Lohade, an analyst with JM Financial Institutional Securities.

Most producers are unlikely to make profit in 2015-16 even as the outlook is a little brighter, Sawhney said, adding "the positive mood is an indication of the fact that there is a government policy that is assisting the revival."

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