Bannari Amman Sugars: Buy

>> Sunday, April 5, 2009

A steeper-than-expected downward revision in sugar output estimates has made the outlook for domestic prices quite bullish over the medium term.

Despite policy intervention to curb prices, sugar prices, over the next few quarters, are likely to respond to the extremely tight demand-supply situation.

Higher realisations on sugar are likely to reflect in improving profit margins and expanding earnings for select sugar producers which have access to adequate cane supplies over the next two years.

Bannari Amman Sugars, an integrated sugar producer with cane crushing capacities of 14,000 tcd spread over Tamil Nadu and Karnataka, appears a good investment bet in this scenario.

Lower cane prices in the southern markets, the company’s ability to weather deficit situations in the past and its integrated operations, suggest that it may be among the sugar players better placed to capitalise on the favourable turn in the sugar cycle.

At the current price of Rs 661, the stock trades at just six times its estimated earnings for 2008-09, at a discount to peers such as Balrampur Chini Mills and Bajaj Hindusthan.
Buoyant price outlook

Following three downward revisions in output in March alone, the current sugar season (October 2008 to September 2009) is expected to close with a domestic sugar output of 145 lakh tonnes, a 45 per decline from the 264 lakh tonnes produced last year.

After considering imports of 15 lakh tonnes, that is likely to leave closing inventories at just 12 lakh tonnes, a precariously low stock of just one month’s consumption. Even a higher output of 200 lakh tonnes for next year may just about balance supplies with demand.

These trends suggest that domestic sugar prices may remain upward bound over the next few quarters, even after the 30 per cent jump in prices since July 2008.

Given the political sensitivity of the issue, spiralling sugar prices have attracted policy curbs in the form of permission for duty-free raw sugar imports (under advance licences), stock holding limits on the sugar trade and higher free sale releases of sugar for this quarter.

But moves such as the imposition of stock holding limits and higher free sale releases may only give a short-term boost to supplies and are unlikely to have any lasting impact on prices.

Yes, duty-free raw sugar imports have the potential to impose a cap on any significant price rise in the domestic markets. However, imports are not an attractive proposition at current global price levels and prices will have to weaken substantially to make imports viable.

Even if raw sugar imports do become attractive later this year, players such as Bannari Amman Sugars are positioned to turn this into a revenue opportunity, given their sugar refining capacities (800 tcd post-expansion) that enable processing of raw sugar into white sugar for domestic sales.
Integration helps

Having steadily increased its crushing capacities over the past three years, Bannari Amman Sugars has also invested in forward integration projects, by adding to power cogeneration (currently 56 MW) and alcohol capacities. These have ramped up their contribution and helped the company remain profitable during the recent downturn in the sugar cycle.

Plans are on the anvil to expand the acquired (and relocated) 2,500 tcd Modhali sugar unit to 6,000 tcd, while setting up a 28.3 MW cogeneration plant. Regulatory approvals have also been obtained for a new 5,000 tcd integrated unit at Tiruvannamalai in Tamil Nadu.

Revenue contributions from these expansion projects may not flow in the near term, given the severe constraints in cane availability and higher competition for its procurement this year.

However, over a two-three year time-frame, as the company invests in cane development in the new command areas, these expansion projects may contribute not only to better volumes but also to a more diversified profile.

Escalation in cane prices and shortfalls in cane availability pose the key risks to the company’s earnings over this year and the next. However, cane prices in the southern states are still well below SAPs in States such as Uttar Pradesh.

Raw sugar imports and by-products such as power, alcohol and ethanol allow mills such as Bannari Amman to improve overall realisations. That may allow sufficient room for the company to earn a reasonable margin, even after shelling out higher cane prices this year.

Though crushing volumes are likely to be sharply lower than last year, it may be compensated by a sharp improvement in sugar realisations.

The first nine months of 2008-09 saw a sharp expansion in the company’s net sales (up 38 per cent to Rs 638 crore) and net profit (Rs 8.5 crore to Rs 84.6 crore), helped by liquidation of inventories and the sugar business’ return to profitability. The per share earnings stood at Rs 101 for the trailing 12-month period. Source - Hindu Busniess Line (HBL)