Mumbai: Personal finance magazine 'Money Life' has recommended investors to buy Dwarikesh equity shares saying it is one of the five most growing sugar stocks. Here are major portions of the article:One of the sectors that have performed exceptionally well through the bear market is the sugar sector, and is going to do even better. This is simply because sugar supply is going to fall far more short of demand than was forecast earlier. Kingsman, a Consultancy firm for sugar and ethanol, has raised its estimate of global sugar deficit from 2.5 million tonnes to 4.5 million tonnes for the year ending March 2010. This can be attributed to the declining production in India and strong consumption in India and China.
Indian farmers have diverted their land to more profitable crops in the last season when global surplus drove sugar prices down. They have also been put off by the scrap between sugar companies and Uttar Pradesh politicians who insisted on a unreasonably high minimum support price last season.
The global shortfall in sugar is so severe that even a better-than-expected production in Brazil has not helped to improve the situation. Brazil will produce 31.2 million tonnes of sugar in the current April-November harvest, up from 26.7 million tonnes a year earlier. However, most of its sugarcane is used for ethanol production. Approximately, 33% of the total crushing capacity in Brazil has no diversification facility- they cannot switch over to sugar production from ethanol.
Besides, Brazil cannot increase its sugar output as its sugar mills are operating at full capacity. Kingsman says that the price of sugar now depends on how much India will import in the coming weeks and months. India has contracted for about two million tonnes of raw sugar since February 2009.
Will higher sugar prices encourage farmers to increase sugarcane production? More remunerative prices and shorter cycles in other crops and lower input cost may resist farmers' interest in sugarcane. Cane is harvested after 12-14 months from the time of plantation and farmers get paid 13-15 months after cultivation. So, farmers are likely to switch to shorter duration crops. The rise in acreage will not be enough to increase the production, which has been estimated at 230 million metric tonnes by the Indian Sugar Mills Association. For 2009-10, while the demand will be 21 million metric tonnes.
Price is expected to go higher as the sugar shortage will continue into the next year. Given this bullish scenario, (these) sugar stocks are going to do better in the days to come:
Dwarikesh Sugar has three sugar plants- all in UP. Two of them are located in Bijnor district and the other is located in Bareilly district. The capacity of the distillery unit is 30 kilolitres per day. It has 86 MW of power generation capacity, of which 30MW is used for captive consumption and the rest is sold to the UP government grid.
Its five-quarter average sales growth was 40%. The margin has surged in the past two quarters which is attributed to the rising prices. Its operating profit margin was 26%. The lower sugarcane average in UP is likely to continue in the coming harvest season which will keep sugar prices high. Dwarikesh is expected to gain from this. Its market-cap is 0.34 times its sales and barely one time its operating profit.
- Money Life
July 2, 2009
