Sugar prices to remain stable for six to eight months: IIFL

Bhavesh Gandhi, Research Analyst, IIFL, in an interview with ET Now talks about sugar stocks and its movement in near future. Excerpts:

ET Now: Most people are talking about oversupply in the global market, but the domestic supply may remain tight. But the point being the stocks, the way they have crashed are they pricing in the worse already or could there be more downside?

Bhavesh Gandhi: Broadly if you look at the domestic demand supply, then we could have about 5 million tonnes of inventory by October this year, which is quite a reasonable figure. And should not be a key factor for sugar prices being going down drastically or going down at all from the current levels. So broadly the prices should remain stable at least for the next six to eight months where there is no crushing. So in lieu of that stocks like Balrampur, which are completely a domestic play compared to Shree Renuka Sugar which does have the Brazilian angle to it, so for stocks like Balrampur we do not believe that the stock could have further downside from here. In fact, we are looking at upsides of about 15% to 18% at least from the current levels.

ET Now: I am glad you brought that up because I wanted to talk about individual stocks and let us start off with Balrampur Chini. Not a bad set of numbers. Has come down to levels wherein it would be quite substantially below the replacement value as well. What would the rationale be for buying into a Balrampur, would it essentially be the replacement value or would it be that it is at a point of a time in the cycle wherein the prices of sugar might not go down too much and therefore it will not be too deep into the losses, should they come about in the next year?

Bhavesh Gandhi: For Balrampur, the domestic demand supply should ensure that sugar realisations should remain broadly stable in the Rs 27 to Rs 28 a kg and plus we could have higher crushing volumes. So, that should drive the volumes. Based on the volume expansion plus stable prices, I think probably the stock does have, as I said earlier, 15% to 17% upside from the current levels.

ET Now: What is the angle with Renuka because a lot of sell side houses spoke very highly about Renuka Sugars when it was at those 90-95 levels because of the fact that it was a global player. It has come down to some 60 odd levels and the capacity that it has on a consolidated basis is not too less either. It is a fairly high capacity. Is the price figuring in the worst or could there be more downside?

Bhavesh Gandhi: The journey for the stock price from here, in our view, should be up rather down because broadly as you said it is a global play now with Brazil and India interplaying out and since Brazilian crushing has started from April, there season is from April to December. So, from that point of view, revenue, EBITDA and profit for the next two quarters, June and September quarters, should be driven by Brazil. So, EBITDA show from Brazil, since they have hedged 80% of their sugar production at about 23 cents per pound, should protect them from any downside in any international prices that might come. Also international prices, I think broadly the company had said earlier in its post earnings call that they might go below 26, but then not stay there for quite long. So we do not expect prices to shoot up, but then also they could remain stable. So in lieu of both stables, let’s say, domestic prices and support from international side, Renuka should have another 15%-20% upside from the current levels.

ET Now: What about Bajaj Hindustan? You think the debt burden is a big overhang still or given the position they have in the market, there would be a review of the outlook there?

Bhavesh Gandhi: Bajaj Hindustan, the debt hovering has been a key concern on the stock for the past few quarters or so. And that would continue to be so, till we see some sort of equity infusion in the stock as the company has announced rights issue. So that could be a factor, but then that could be a big dilution going ahead. Broadly we would prefer Balrampur and Renuka in that order and rather avoid Bajaj Hindustan.