Sugar prices much higher; bulk of imports is in our future. With the
monsoon playing truant, we revise our expectation for sugar production in
India for the next season to 14 mn tonnes, compared to current industry
estimate of 16 mn tonnes. We now expect India’s import requirement to be
15 mn tonnes over a three-year period (FY09-11). India’s massive imports
are likely to drive down global sugar inventories to historic lows by 2010.
While sugar prices have shot up in anticipation, we expect prices to go much
higher as the bulk of Indian imports are yet to happen and the stock situation
globally is likely to get extremely tight over the next 12 months.
■ Policy – priority, timing to ensure no drastic steps. While rising prices is
a concern for the government, we believe ensuring adequate availability is
likely to take priority in policy-making. We do not expect any drastic
measures that will cap sugar prices or ‘end the sugar story’.
■ Macro trend to dominate other issues. We expect the macro trend of
rising prices to dominate issues such as higher cane costs and lower
sourcing which could adversely impact earnings, as well as concerns on
valuations.
■ Bajaj Hindusthan and Shree Renuka are our top picks. We upgrade
Bajaj Hindusthan to OUTPERFORM from Neutral with a target price of
Rs238 (from Rs75). Higher imports, capital-raising and significantly higher
sugar prices have turned around prospects for Bajaj Hindusthan, in our view.
Our other preferred play is Shree Renuka; we upgrade its target price to
Rs260 (from Rs182).