Citigroup - Indian Sugar

Citigroup in their report on Indian Sugar Companies

UP sugar incentives withdrawn — UP govt. has withdrawn the sugar incentives provided by the previous govt. to sugar mills for investments in capacity, and is looking to replace this with a new incentive scheme. Until details of the new scheme are known, it is difficult to ascertain the impact on sugar mills. UP sugar policy entailed subsidies for companies investing above Rs3.5bn in sugar assets. Subsidies added up to about Rs1.4 /kg for sugar produced from new assets.

UP sugar mills new demands — UP sugar mills have demanded sops from the new govt. entailing reduction in cane price, tax exemptions and export subsidies. We estimate that the subsidies demanded add up to over Rs3 per kg of sugar. If the govt. accepts these demands, mills would be net beneficiaries.

Price outlook remains bleak — Latest ISMA estimates have raised FY07 Indian sugar output to 27.2m tons, up from 23m tons estimated at the beginning of the season. This would significantly add to inventories and is likely to delay price recovery. Current average realizations in UP are about Rs14/kg

Incorporating worst case scenario — Cutting FY07-FY09 EPS estimates for BJH by 15%-104% and for BRCM by 11%-94% as we 1) cut realizations to Rs14.25/kg and 2) remove the UP sugar policy subsidies. We also shift our valuations to replacement cost, which we believe will form the base for sugar stocks given the current uncertainty. Reducing price targets – BJH to Rs229 from Rs300 and BRCM to Rs88 from Rs107. Maintain Buy on BJH, while cut BRCM to Hold from Buy

Near term upside risk — A beneficial new sugar policy / subsidy by the UP govt.