Bannari Amman Sugars- Cyclical Play

Introduction:

BASL was incorporated in 1983; it started commercial production in the year 1986 with an initial capacity of 1,250 TCD at Sathyamangalam in Erode district, Tamil Nadu. As on March 31, 2010, the company has a total capacity of 19,000 TCD. The company’s other sugar units are at Nanjangud and Kunthur in Karnataka and at Kolundampattu in Tiruvannamalai district in Tamil Nadu. The company also has distillery units, with a total capacity of 127.5 kilolitres per day, situated in Tamil Nadu and Karnataka. Through these distillery units, the company manufactures extra neutral alcohol (ENA), ethanol or absolute alcohol, depending on the market demand. BASL has also developed cogeneration plants at Karnataka and Tamil Nadu, having combined power generation capacity of 84 MW. The company also has wind power generation capacity of 29 MW in Poolavadi and Gudimangalam near Coimbatore.

Sugar Unit-I: The first Sugar Unit near Sathyamangalam of Erode District, Tamil Nadu State, started its commercial production in the year 1986 with an initial capacity of 1250 Tonnes of Cane Crush per day and expanded to 2500 Tonnes in 1998. The crushing capacity is now expanded to 4000 TCD. The Sugar Unit -I has an imported facility to produce 300MT Refined Sugar per day with ICUMSA less than 20 IU and the same is mainly marketed to Pharmaceutical and Food Industries in India and exported to all countries.

Sugar Unit-II: The Second Unit of Bannari Amman Sugars Limited, near Nanjangud in Mysore District of Karnataka State, started the commercial production in the year 1992 with an initial cane crushing capacity of 2500 Tonnes per day and expansion to a capacity of 5000 Tonnes in Year 2000. Another expansion to 7500 Tonnes Cane Crush per Day was completed in July 2006. A Sugar Refinery Plant with a capacity of 500 MT per day has been installed.

Sugar Unit-III: The Company has acquired a sugar mill having a cane crushing capacity of 2500 TCD in Kunthur Village near Kollegal in Karnataka by way of amalgamation of M/s. Maheswara Sugars Ltd, with the company. The Karnataka Government has approved the proposal to change the location of this sugar plant and to establish a new Sugar Plant with 6000 Tonnes Cane per Day from the existing capacity of 2500 TCD besides setting up of a 28.8 MW Co-generation Plant.

Sugar Unit-IV: It is a new Integrated Sugar Complex comprising of 5000TCD Sugar Plant, 28MW Co-generation Plant, Distillery Ethanol Plant and a Bio Composting Unit at Kolundampattu Village, Thandarampattu Taluk, Tiruvannamalai District.

Sugar Industry

I. Global Scenario

Sugar is a widely traded commodity. On an average, about 70% of world sugar production is consumed in the country of origin, and the balance 30% is traded in the international market. A part of the international sugar trade occurs under specific agreements (Preferential trade, long term agreements, etc.) that, in some cases include clauses on import prices. As mentioned, around 30% of world sugar production is traded in the world market. The Sugar prices in the international markets are of vital importance. The demand-supply position is the main factor explaining changes in international prices. It is difficult to measure consumption; therefore, it is often estimated as the disappearance of stocks. The best indicator for explaining changes in sugar prices is the stocks-to-use ratio which encompasses the growth in consumption. There is generally an inverse relation between changes in the stocks-to-use ratio and prices. During the year 2009-10, weather played havoc with crops across the globe which resulted in significantly lower output in number of countries with Brazil, China, Thailand and Mexico being the most notable ones. The world production was 153.5 million tonnes as against 143.5 million tonnes last year showing 7% growth year on year. The consumption was at 155.1 million tonnes, thereby reducing the global stocks by 1.6 million tonnes and shown growth of 1.3% in consumption and export. Stock availability as a percentage of consumption (stocks to- use ratio) is down by 1% at 13% from 14% of last year which is at lowest level in last 20 years. For the season 2010-11, surge in domestic prices led to more plantations in large-scale producers such as Brazil, India, China, Australia, Thailand, Pakistan and Indonesia, with estimates of 165.0 million tonnes of sugar production the market can be expected to swing back into surplus in 2010-11. Being global demand is expected to rise in 2010-11; the surplus will not be burdensome and at the same time is even welcome as stocks need to be replenished to be at reasonable level.

II. Indian Scenario

India is one of the largest producer and consumer of sugar in the world. The Indian sugar industry has a turnover of around Rs. 70,000 Crore and is the second largest agro-based industry, next to textile industry. Indian sugar industry is highly fragmented with mills of average capacity of 3,600 TCD, where in internationally the minimum economic size is around 7,500 TCD. Out of various models of business in this industry, Sugar - Molasses - Power and Sugar - Ethanol - Power are more prevalent. The sugar production in Sugar Season 2009-10 outstripped the expectation owing to higher than anticipated production in UP and Maharashtra. Towards end of the year 2008-09, there was about 1.4 months stock available in pipeline but during 2009-10, once the prices started falling and also stock limits controlled by Government, the trade resorted to hand to mouth buying leaving hardly any stock in pipeline. The actual release was of 20.8 million tonnes but the consumption was around 22.5 million tonnes. India imported roughly more than 4 million tonnes in Sugar Season 2009-10 to meet the demand. In year 2009-10, cane acreage reduced by 2.1 lac hectares due to increase in minimum support prices (MSP) of alternative crops especially wheat and rice. As a result, India witnessed lowest sugarcane produce of last five years at 278 million tonnes. However, better yield at 66 tonnes per hectare was a support to some extent.

Million tones 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Production     14.00      12.69     19.27      28.3        26.3       14.5      18.8

Consumption 17.29       18.50     18.50     20.0        22.2        22.5      23.5

If one look at stocks to use ratio in case of Indian scenario, it has reduced from 63.3 % in 2002 to 13.5 % as on date. It simply means that earlier the inventory in pipeline was for almost seven months which have been reduced to one and half months now. It effectively means any crop failure will result in sharp upswing of sugar prices as sugar availability will be very low and this situation is all over the world. If some urgent measures are not taken then there is a good chance that sugar prices will be shooting up to roof as consumption is rising but production is stagnating. Besides, acreage for sugarcane in India this year will be almost at highest level. I am of the opinion that next year onwards we will start seeing hardening of sugar prices and sugar prices will be in a major long term bullish territory and opening up of sugar sector and industry is imminent.

Financials:

Co sales have increased from a meagre 14 Cr in 1985 to 853 Cr in 2010 and profits in the same period have increased from 55 lakh to 199.73 Cr while equity have just increased from 3.73 Cr to 11.44 Cr including one bonus of 1:1 also. It looks like a consistent growing sugar co which is rare to find in this industry. Co Current year EPS is around 55 Rs/share and current price looks reasonable from that angle. Dividend of 10 Rs/share means a yield of 2 % at present level.

Technical Analysis:

Share price of Co moved from a low of 95 in 2003 to 1700 + by 2006. Since then co share price is in correction mode with high price range of 1200-1500 and low price range of 400-550 Rs zone. Considering the long tern prospect of Sugar industry, it looks like this range will be broken on upside sooner than later. This short to medium term weakness in sugar looks like a good opportunity to me for investment.

 Investment Theme:

I am very bullish on sugar as a commodity on very long term basis. On international levels, the chart of sugar is looking extremely bullish though in short to medium term it looks weak and can test level of 15 even though at present it is trading at 24-25. Rather, I will say I am more bullish on agricultural commodities as the consumption of these will increase with Asia leading the growth and there will not be any decline in consumption in western world in agricultural commodities as it is essential. I am going to invest in 7-8 sugar cos to diversify base. Bannari Amman sugar is one of them as I have invested 20000 Rs in this stock @ 560 Rs/share with an option of investing 30000 more at price range of 450-500 Rs/share.