Monday, 27 November 2017

Indian Sugar Sector: A Bitter Mess of Politics and Policies Stocks covered EID Parry, Praj Ind, Jain Irrigation



 After the recent post on Praj Industries (Click here for the post) I am getting repeated queries on the Indian Ethanol and sugar sector. I generally avoid commodity stocks like steel, sugar etc. But my interest in sugar sector was mainly due to the hunt for a player who can establish first Indian premium sugar brand. EID parry was a step in this direction ( Click here for the first part) and (here for 2nd part on EID). EID was earlier advised around 160 and then at 300, CMP is 370 and i have done buying recently around 300. I do not follow sugar stocks that keenly and for that reason not a regular tracker of sugar industry. But will try to share my view on the sector. Indian sugar sector (Like every other sector) is a victim of shabby govt planning and control. 

But let me tell you some good things first:

Indian sugar industry which was going through the pain for last 2-3 years had witnessed some revival last year mainly due to local and global rise in sugar prices and some corrective policy measures from govt.

Drought lead to low production in Maharasthra and Karnataka last year and rising global prices result in the price rise in India which saved the ailing sugar industry. In 2016-17, Indian sugar production was around 20.3 MT and over all consumption at about 24 MT which was the main reason for the price rise. Globally demand was higher resulting in high prices which further provides the support to Indian sugar industry.

Global supply declined because of increase in the use of sugarcane for producing ethanol in Brazil due to the increase in mandated ethanol blending in gasoline, from 25% to 27%. And in other places like Thailand, China’s production declined on account of decrease in the area under cultivation due to high producer costs. This was normal consolidation where low prices put pressure on the supply side. 

Indian government also introduced various measures to boost exports and curtail sugar imports which resulted in the growth of wholesale sugar prices in India. The government in December 2015, announced production subsidy @ Rs.4.50 per quintal of cane crushed which should be paid directly to the farmers on behalf of the mills and after the rise in the sugar prices it had been withdrawn.

But now again, global prices are falling due to supply issues. India is also going to witness high sugar production this year…around 25% growth. Area under sugarcane cultivation has also been increased by some 10%. But this time, Indian Govt has imposed import duties. Wholesale prices this time are around Rs. 36 per/KG. So all that means that Indian sugar prices may not fall that much to lead sugar industry again into mess.


Now let me come to messy part:

I have already mentioned the mess created by politics and Govt in Indian agriculture in so many of earlier posts. Sugar industry is one of the prime victim of political melodrama and policy quagmire. Millions of farmers cultivate sugar cane so in order to lure their votes central and state governments fix sale price (via all types of MSP, FRP or SAP) of sugarcane to be paid by sugar mills turning sugar cane into a major cash crop and every year more and more farmers are lured to grow sugarcane. Maharashtra grows sugarcane when in fact it is not suitable at all to grow sugarcane as most of its sugarcane producing areas does not receive adequate rainfall.

This year also, area under sugarcane cultivation has also been increased by some 10%. So we can see that more sugarcane is getting produced in India and Sugar mills are under legal compulsion to buy and crush all the sugarcane produced in their areas. It results in much higher production of sugar than the actual demand. India produces on average around 35 million tonnes whereas demand is around 24-25 MT resulting in the over production of 10 MT which depress the sugar prices and sugar mills incur heavy losses which also hamper their capability to pay the farmers dues on time. So to overcome this crisis, either the Govt pays the farmers the arrears through subsidy (like it did last year) or it buys out the excess sugar from mills at higher prices or it allows mills to export excess sugar produced by offering export incentives which are nothing but a part of the cost of sugar production in India as global prices are down so Indian mills are  forced to sell sugar in international markets below their cost and to make their losses good Govt offers them export benefits!!!!...???? AMAZING…isn’t it!!!

In Maharashtra, in the last five years, sugarcane prices have gone up drastically as compared to other crops like wheat, soybean, cotton or paddy. So although sugar prices are falling but farmers are still growing more and more sugarcane because they are assured of price and procurement by mills.

And to make the matter worse is the shortage of pulses and oilseeds in India due to which India is forced to import pulses and oilseeds worth thousands of crores. India imports 60% ( Production of 9 MT against demand of around 24 MT) of its edible oil needs valuing some 70000 cr!!! The figure for the import value of pulses is 20-25000 cr which is around 25% of India’s demand for pulses!!! 

One of the primary reasons for this shortage is the usage of agro resources like land, water, Govt support on on excess production of cash crops (Political crops!!) like sugarcane, rice etc. All this leave little for the support of oilseeds and pulses. States like UP, Karnataka and Maharashtra provide preference to sugarcane for water supply and almost 100% sugarcane area is under irrigation. Loan free schemes, Interest free schemes are launched regularly by Government to save the farmers which left very little in the hands of Govt to spend on more important pulses and oilseeds. Our government does not even have a regular focused agro policy as they keep changing their actions like at one time they impose export restrictions and then all of a sudden reduce the import duty, they say publically that grain production is sufficient but then they allow the imports and lower the import duties…they just don’t know what they are doing and what is their target. We also don’t know when this mess will end….political masses are very consistent in creating and making people living in mess.

So all this creative policy making results in overproduction of sugarcane and sugar and an industry marred with high losses and farmer overdues. But at least now I feel that our government will impose import duty to keep domestic sugar prices well above cost of production in order to safeguard mills and farmers (and of course themselves). So I don’t see big headwinds in the sector in the near future. 

Mess and More Mess

But this is not the ideal solution as we should first of all solve the issue of high cost of sugarcane cultivation in India. The reasons for high cost of production in India are many like shortage of water and irrigation facilities, poor land selection by farmers due to assured prices as most of the sugarcane produced in our country has low sugar content of below 10%, less use of adequate fertilizers, micro-nutrients and pesticides resulting in low productivity , very small land holdings etc. Sugarcane is a very stubborn crop: has some 12 month cycle, needs huge amount of water regularly, not economical to store sugarcane due to low value and low sugar content, as it has low sugar content compare to its weight and loses sugar content quite fast so mills have no other option but to crush it sooner. So much to make it a sweet deal!!!

But please do not think that our Government is doing something good for farmers and mills by loan waiver and interest waiver schemes because all the money that they wasting is taxpayers money and they are just wasting it to lure the farmers to remain in the power. 

Like, it is mandatory for each sugar mill to sell 10% of its production to central government at lower price than market value (Levy sugar) so that our highly intellectual government can meet its targets to distribute low cost sugar through PDS. The result of this charity-Rs. 3000 cr burden on sugar industry which ultimately falls on taxpayers.

This entire policy quagmire has resulted in the dire consequences for country as situation of our precious natural resources like land and water is worrisome. So it is better to leave the theme of “Poor sugarcane farmers” and to make farmers aware of the other better opportunities in other commercial crops like pulses, oilseeds, horticulture, fruits etc.

Direct Ethanol production is one of the Option

However, due to complexities of the sugar sector due to involvement of politics means that current production status quo may be maintained and we may continue to have excess sugarcane cultivation. But one thing I would like to mention is that Indian sugar companies derive substantial portion of their profits from ethanol and spirit so in my view it would be great if our government could allow direct production of ethanol from sugarcane juice rather than from molasses. This will increase the production of ethanol manifold along with ensuring the better demand supply situation for sugar in the country.

Conversion of excess sugarcane to white sugar is foolish and must stop. Instead, our Government should assess the demand of sugar in the country and should direct to use some part of sugarcane for producing ethanol directly. So I hope that in the future our government will come up with some better and long term policy with regard to production of ethanol directly from sugarcane juice and if that happens then there will be high re-rating of the sugar stocks.

But still nothing compared to the quantum growth which will occur to Praj if its 2G ethanol project is a commercial success.

Last year UP based stocks tasted the sweet success

I am not tracking many sugar stocks apart from EID Parry which is my favorite due to strong brand recall, visionary management, high share of institutional sale, high growth bio-pesticides and nutraceutical business. EID parry is one of the most efficient producers of sugar in India and associated with introducing revolutionary technologies in sugarcane production in areas it operates. It has very strong relations with farmers which shows the high ethical standards of the company. 

In the bull run of sugar stocks last year, south and western states based stocks did not given that much returns as most of the southern and western states suffered drought last year and not enough sugarcane was available for crushing and enjoy the high sugar prices. So UP based companies made the most of the Bull Run as they had the production and inventory to supply sugar to all India. Stocks like DCM, Dalmia and Balrampur has given high returns ranging from 500% to 1000% as they witnessed quantum jump in their profits. In fact, I think that even in this year, UP based companies may be the only ones carry good quantity of sugar stock. But I do not track any other sugar sector company besides EID so not sure which is the best bet now. However, whenever I’ll got some spare time then will try to find something in northern India sugar industry and will share the same. By the way, I am holding DCM Shriram which is the parent of DCM Industries which is into sugar. DCM Shriram was suggested around 60 at this blog and it is trading at 530 and I am still holding this one.

All the growth witnessed by south based players like EID parry was due to price increase not due to volume growth. EID, in 2016-17, crushed 44.44 lac MT of sugarcane as compared to 56 lac MT last year a drop of 20% and total sugar production was at 4.33 LMT as compared to 5.87 LMT last year.

It was all downhill for south based sugar companies last year-Still I like EID Parry

This year rain was good especially Maharashtra witnessed good rains and it is expected that Mharashtra will see some 70% growth in the sugar production next year. Karnataka also got good rains and so that will help EID parry to some extent but Tamil Nadu and AP didn’t get too many so EID has given the guidance of overall crushing of 39 LMT down from 44 LMT last year which implies that EID will have to focus on imports of raw sugar to meet its production targets but realization will be impacted due to high cost of import of raw sugar.

However, EID has got the approval from Indian Govt for the duty free import of raw sugar of 64000 tonne and so it is expecting to meet its previous year sales volume. It is expecting that Karnataka will make up to some extent the loss suffered in Tamil Nadu. Last yeat although It crushed less sugarcane but due to sugar stocks of previous season it managed to salvage the downhill. 

I also feel that Drip irrigation and river interlinking project can save the chronic issue of high dependence on rain water in India. Maharashtra has even made the use of drip irrigation mandatory for sugarcane cultivation which I feel is a step in the right direction. This will help our other Agriculture pick- Jain Irrigation.

South India was the corner stone of water conservation in India during ancient times. But at present state like Tamil Nadu has exploited 80% of its irrigation potential and some 142 water blocks are in over exploited zone out of total 385 water blocks. South India receives two monsoons a year and we also hear the news of Chennai getting flooded every now and then. So then what is happening to all this water? Actually the reason is high ground water based irrigation systems while earlier they were using techniques like rain water harvesting for better use of rain water which they are not doing now and the result is severely depleted ground water levels. All this has turned water surplus southern India to water depleted. 

But now some parts of Tamil Nadu are trying to revive their century old traditions of using rain water more efficiently and also focusing more on organic farming which needs much lesser water due to lower use of chemicals. Moreover Southern states are more suitable for sugarcane cultivation and TN has highest yield in India almost twice of UP. So they should plan to better manage their water resources.

EID is the preferred supplier to Institutional customers due to its high quality products, global certification and customization. Institutional sales always accounts of high share of 40%-last year it was also at 44%.
Last year, the Company commenced the sale of Bonsucro certified sugar, produced from sustainable sugarcane, to a large multinational. With importance on sustainable cultivation practices gaining ground globally, food and beverage manufacturers are taking the lead. E.I.D Parry’s Bonsucro certified sugar will prove a competitive advantage for the company in the long term.

EID’s effort to grow its premium quality and highly nutritious sugar brands “Amrit” and “Vita” and regular premium sugar brand “Parry’s” will bring high growth as there is still a vacuum in Indian branded sugar industry as all the sugar consumed is of bulk quality.

EID has just opened its export based sugar refinery in Nellikuppam which is an SEZ and it imports raw sugar and exports white sugar. It is one of India’s first zero discharge refinery. This year turnover was 1878 cr with NP of 14 cr. The refinery produced nearly 5.98 lakh tonnes of raw sugar and exported 5.96 lakh tonnes. EID is looking to expand the production further and this will be a huge value creator.

At present there is no doubt that Sugar sector in south India is stressed but a lot of efforts are underway to solve the crisis and I think out of this some long term and sustainable solutions will emerge out of this like drip irrigation, rain harvesting etc.
But it also means that sugar prices will remain high in South India as compared to other parts of India and EID may be able to make up for some volume loss due to this.

As shared earlier I am highly optimistic of its nutraceutical business under which it produces, brands and sells algae based nutritional products demand of which are growing fast worldwide. This business is not small and clock around 230-240 cr revenues

EID Parry has very strong R&D in place for nutraceutical product as it is currently the only company in the world with the capability to produce all the three algae-based dietary supplements, including Spirulina, Chlorella and Astaxanthin. In May-2017 it has received the approval from USFDA for its India facility for organic microalgae cultivation and processing which is a 130 acres facility located in Oonaiyur, Pudukottai district in Tamil nadu. This is a significant move as the same will enhance the credibility in the global market. Already the company has witnessed higher sale in European region after the approval. Algae based nutritional products are a growing rage in the western world and these are being consumed in a variety of novel ways like in health drinks etc.

India’s per capita income is also growing fast and as per the experience of the developed economies after a certain level, more growth in income will make people consume and spend more on nutritional supplements. Same thing will be going to happen in India. Only thing which I expect from the management of EID parry is to spend more on brand and product promotion as there are not many people in India who are aware of the presence of algae based nutriceutical products. So I think there are interesting times ahead for organic and herbal nutritional products in India and I don’t see any reason for EID parry to miss this high growth opportunity.

So sugar mills in northern part of the country are poised for another good year but I think most of the growth has already been factored in the current prices wherein in case of EID no value has been assigned for sugar business at all when it is one of India’s best sugar producer. Moreover EID has a lot of unused capacity which in a good cropping year will yield bumper profits and that will provide huge upside from current levels. But still hunt for another pick in sugar sector is also underway and I’ll share the same if find something.

Also, as explained in the earlier posts, the current market value of the EID parry is 6500 cr which just covers its investments in Coromandel International; 62% share in Coromandel is values around 7000 cr after giving holding company discount of 30%. So that means that you are getting standalone EID with some 2500 cr turnover absolutely free and that is a sweet deal!!

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post) 

11 comments:

  1. Sir firstly thanx for such a good effort in educating investors thru this blog.
    I hv query with regard to ur old pick Kiran vyapar.as u mentioned Kiran vyap will benefit largely with d warehousing finance business of Its associate navjyoti agro .But as per annual report they r holding just 19% in navjyoti n it's just associate not a subsidiary.Navjyoti is shown as separate grp co of LN bangur grp.How dis will benefit specically to Kiran vyapar

    ReplyDelete
    Replies
    1. Hi Dear, The eq shares held independently by Kiran are 19.36% but Kiran also has 42% stake in Placid Ltd which is also a group investment company having investments in all of group companies. Also Kiran also holds preference share capital of Navjyoti. At present I don’t know the % holding of Placid in Navjyoti but Kiran has notified their % of ownership in Navjyoti as 40.66% (Page no. 102 and 127 of Annual report of 2016-17).

      Also whether this preference shares are convertible or not that I also don’t know at present. So this 40.66% can be due to both these factors or it can be anyone of these. But this still doesn’t mean that Kiran can’t invest further in Najyoti as both Placid and Kiran are the investment companies of the group and capital to other growing group companies will follow from these two. I am seeing more expansion by Navjyoti and more investments into Navjoyti by Kiran.

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  2. Thnank Guru ....superb article

    ReplyDelete
  3. Suneel2 December 2017 at 21:48

    Hi Gurpreet, Are you still tracking Hinduja Ventures? If so can pls tell in case you have come across any update on HLF IPO... further...
    http://hindujaleylandfinance.com/documents/investorzone/hlfannualreport2017.pdf HLF has a 100% sub Hinduja Housing finance.. this may be a good candidate for demerger...
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    Replies

    Gurpreet Singh3 December 2017 at 16:27

    Hi Suneel, Hinduja Housing has just begun its operations at the end of 2015 so at present the scale is not that much to think about the demerger but HHFL will benefit from the vast scale of the operations of its parent HLF there is no doubt about this as HHFL can expand its reach in India in no time. It is focusing on Tier-II and Tier-III cities to finance the housing needs of self-employed persons which is a relatively not covered much by other traditional housing finance avenues like Banks due to relatively risky than salaried people.

    However, the stake of Hinduja ventures in HLF is around 5.3% which is not that big to conclude the same sometjing strategic for the future of the company. My main reason for investing in Hinduja venture was its digital cable tv business especially HITS. HITS has so far entered in 640 districts in India. For me one of the most significant event was the entry of NXT Digital in Fastway dominated Punjab which had the backing of earlier SAD state government but now losing to other MSO’s like NXT.

    Delays in digitization especially in phase-3&4 along with demonetization has adversely affected the MSO’s. Also, in spite of the official closing of analogue signals in Mar-17 in phase-4, still some 30-40% operators are using analogues signals. Phase-4 with around 9 cr subscribers can be a game changer for HITS. But high competition and lood bath due to entry of Jio and the likes of Netflix may lengthen the road to profitability and topline growth. But still keeping in view the financial clout of the Hinduja group we can expect it to last the final lap of the race.

    Regarding the IPO of HLF, as far as I know they have deferred their plans for the IPO post industry slowdown after demonetization; in fact they have gone for internal funding in which Hinduja ventures has also participated.

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  4. Sir
    What is your assessment about the market , Lot of pessimism is building up , on all fronts like Politics, Economy , oil price etc etc . Nifty is going down . Appreciate your thoughts and expert opinion in this regard . This will help small investors like us

    Thanks

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    Replies
    1. Hi Dear, No need to worry about Indian growth story because our growth and demand is natural i.e. the demand in our economy is not forced or pushed by easy money and expansion policies by Govt. The recent bump is due to cleansing activity of our economy where a lot of buildup capacity was not getting used resulted in bank NPA's and low growth rates. As i have shared in my earlier blog posts we created the capacities like power plants but failed to create the demand for the same which was a major policy flaw.

      But now the work on demand front is on. However banks are cautious on new industry loans; in fact there is no need for further loans for sectors like power, steel etc as we have sufficient capacity but this is not in excess of our needs...our problem is only to use the same like power plants for providing power to villages, cold chains, warehouses and electric vehicles.

      So recent lower private sector investment is due to this cleansing activity as private sector is already heavily loaded with debt. But now new sectors like Logistics, food processing, retail, healthcare have taken up the role of investments for capacity addition.

      Demand from rural India is the key for future growth and will be the main factor to watch out and i think we'll see even faster action from the govt in this regard.

      Structural shift in india investment sector is also underway...earlier Indians only have two investment options Gold and real estate both have lost the shine now and more and more people are investing in financial assets for the first time in India. We'll see even higher participation from indian public in equity mnarket. in the recent times, FII have sold out big time but still there was no looking back for the market as domestic inflows were very strong and they'll remain strong and i think FII's now will have to enter in the market at the higher levels.

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  5. Dear Gurpreet,

    Request if you can also guide on the exit point from the sugar stocks..

    Regards

    Harshad

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  6. Thank you so much for your series on EID. I have also picked up EID and it is 5% of my portfolio at an average price of 320. I have been averaging but I was worried. Reading your posts gives me confidence to average now at this amazing CMP of less than 230.

    Please reply if you feel I should wait a bit more before averaging.

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    Replies
    1. Hi Dear, I feel India can't afford its sugar mess any more so we'll soon see something Sugary. EID is right in the top....so it is a right candidate for averaging but 5% is a bit higher of a stock which belongs to a sector with high uncertainty and its diversification businesses are still growing.

      I usually invest in phased manner in these types of stock which implies investing at every significant event and in case of market led corrections. But if your absolute amount of investment is still not high then go for more buying.

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    2. Thank you for your reply. So much sense you make. The difference between percentage and absolute amount invested also makes sense.

      I will slowly average for the long term. :)

      AND subscribe to your wonderful blog.

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