| Based on the latest Govt of India estimates, sugarcane production in India has been again revised upwards to 347mT, up 25% yoy. This is higher than our assumption of a 20% increase in sugarcane production. Channel checks suggest that final production could be as high as 30% up yoy. Higher growth could lead to a positive surprise on our molasses price drop assumption of 20% in FY11 and 10% in FY12. But price fall could be back ended due to delay in crushing Currently, molasses price declines have been lower than forecast (10% vs est of 20%) on expectations of delays in sugarcane crushing and lower yield in U.P (~25% share of production) due to floods. We are not concerned with this development as 1) current trading volume of molasses is negligible due to off season 2) delay in crushing would lead to bunching up of supply in Mar Q leading to a sharper decrease in prices, making up for more moderate reductions in Dec Q and 3) sugarcane yield is relevant for sugar production and not for molasses production which is a by product. Ethanol blending yet to take off; Rise in demand priced in Supply of ethanol is expected to begin by mid-Nov (vs announced date of 1st Oct) only after the crushing begins. Also, due to technical reasons only 70% of demand has been tied up by Oil Marketing Companies as of now. ENA/Molasses prices have moved up 5-10% since announcement of the program. Also, demand from ethanol is factored into our demand – supply scenario. Hence, we believe going forward actual sugarcane production would be the key price driver of molasses /ENA and not demand for ethanol which is now already factored in. Sugar deregulation, high global prices could be positive We believe the current global shortage of sugar and resultant high prices could lead to a longer sugar cycle in India. Initial steps towards sugar industry deregulation in India make us believe that sugar exports from India could be allowed. This should improve realizations of Indian sugar manufacturers and allow them to pay a higher purchase price for sugarcane. This could incentivize sugarcane farmers not to rotate out to growing alternative crops and maintain high supply of sugarcane beyond the typical two year sugarcane cycle in India. Maintain our molasses price estimates; could be back ended Despite molasses moving up marginally in September, we maintain our estimate of a 20% decline in molasses prices in FY11E and further 10% decline in FY12E. We recognize the possibility of price declines getting pushed back towards Mar Q rather than in Dec Q due to delay in crushing and overhang of additional demand from ethanol blending of fuel. However, with actual sugarcane production expected to beat estimates and bunching up of excess supply in Mar Q, we e xpect a sharper than expected fall in molasses prices, making up for the delay. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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