Sugar industry: High on demand-supply mismatch

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: Sugar stocks are soaring. The industry has shown double-digit sales growth and thus, accelerated the stock prices to touch new highs. The share prices of some of the sugar majors like Bajaj Hindustan, Balrampur Chini and Dhampur Sugar have gone up by 165%, 114% and 258% to trade at Rs 212, Rs 88 and Rs 157, respectively. Demand is exceeding supply as sugar production fails to meet expectations.

For 2005, the total sugar production in the country touched 135.46 lakh tonne, a fall of 32% when compared to the past two years. Sugar prices have risen sharply in recent months, both in medium- and small-grade sugar. After a recent peak in the month of January-February 2005, at Rs 19-20 a kg range, currently the prices are flat and hovering at Rs 17-18 a kg. Low production of sugar has resulted into low carry-forward-stock.

Says Vikram Suryavanshi, research analyst, Karvy stock broking Ltd: "Since the companies generate 80% of the revenue from sugar production, the fluctuation in sugar prices impacts profitability of these companies. Since sugar prices are controlled by government, companies cannot earn extra profits as in the case of other industries."

India is the largest consumer of sugar with an annual appetite of around 195-200 lakh tonne. The Indian sugar industry is the second-largest producer in the world, with 510 sugar mills having an installed capacity of 178.70 lakh tonne, spread over 16 states in the country.

The sugar sector in India has passed through certain structural changes in terms of improved cane utilisation, capacity expansion, cane acreage and production. A lower production in the preceding two seasons helped the industry to liquidate surplus inventory.

Inventory to feed ahead

For the season ending 2006, sugar production is expected to touch 175- 180 lakh tonne. While the demand is expected to be at around 185-190 lakh tonne, the closing stock may remain at 40-42 lakh tonne. The level of closing stock to sales have comedown drastically from 69% in 2002-03 to 27% in 2004-05.