Sugar Stocks: A good, defensive pick in a market which is turning weak

Sugar prices have seen a sharp rally in the last year from Rs 17.50 per kg to Rs 33 per kg. International prices are at historic highs too, with global inventory at a two-decade low, due to a significant fall in sugar production globally. Impact of adverse weather on production in Brazil and India, the two biggest sugar producers has contributed to this shortfall in a major way.

Triggers

-         Shortage of sugar cane due to adverse monsoon, declining yield and farmers strike

-         Low inventory levels (currently at 10-year low i.e. 1.7 months of consumption)

-         Unattractive raw sugar imports

-         Shortage in global sugar supply due to fall in sugar output in Brazil, the world's biggest sugar producer

Demand – Supply Scenario

(In million tonnes)	SY07	SY08	SY09	SY10E
Opening Inventory	3.7	10.1	10.4	5.6
Production	28.3	26.3	15.0	16.0
Consumption	20.2	21.1	22.0	23.0
Imports / (Exports)	(1.7)	(4.9)	2.5	6.0
Closing Inventory	10.1	10.4	5.6	4.6

Industry Estimates for Sugar Production in SY10

Outlook

We expect the current scenario to continue for the next two years. Moreover ethanol demand is likely to pick up again as concerns on rising fuel costs and global warming raise their heads again.

Therefore stocks like Shree Renuka Sugar, Balrampur Chini, Bajaj Hindustan and Sakthi Sugar can safely be bought on declines and have the potential to generate returns even if the broader markets were to weaken further.