Sugar companies are expected to benefit from the upturn in sugar prices in recent weeks.

An anticipated drop in sugar production, due largely to inadequate rainfall in parts of Maharashtra and switching of crops by farmers, has led to a rise in sugar prices. 

The sugar season in India runs from October to September. Sugar production in the 2008-09 season is expected to be at 16-18 million tonnes (mt), as compared with 26 mt in 2007-08 and 28 mt in 2006-07.

Balrampur Chini Mills (BCML), for one, is seen benefiting from the strong sugar prices. At the end of the June quarter, the company's inventory was valued at Rs 14,800 per tonne. With sugar prices currently hovering around Rs 20,000 per tonne, it cannot but gain on its inventory in the first half of 2009, thus helping earnings for the year.

In fact, the Uttar Pradesh-based company was the biggest beneficiary of higher sugar prices in the December quarter as it sold an inventory of 31.6 lakh quintal purchased at Rs 14.05 per kg in September for an average realisation of Rs 17.7 per kg.

Analysts like the BCML stock in the space. At Rs 52.90, it trades at eight times its estimated earnings for 2009 and can be considered on declines. However, there are some concerns. In a bid to ease prices, the Cabinet on Monday decided to impose limits on the quantity of sugar that can be stocked. The curbs would initially apply for four months. This came even as the Cabinet Committee on Economic Affairs deferred a decision on offering higher minimum support prices to sugarcane farmers for the 2009-10 season, from the current Rs 81.81 per quintal.

The government has already allowed mills to sell imported duty free raw sugar in the open market to ease domestic supplies.

All this could stand companies such as Renuka Sugar and sugar mills in other coastal states in better stead compared with BCML, which has 12-15% a higher cost of processing raw sugar, say experts.

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication