how a sugar investor can play the sugar cycle!!!!!!!!!!!!

Sugar being a commodity, the sugar industry is cyclical in nature. It is a typical cycle which is affected by cane supply and sugar demand. In this article, we take a look at how to identify a good sugar stock. Currently, with the sector looking bitter, it is even more important to identify the right stocks to sweeten the gains

Sugar is a cyclical and a highly regulated industry. Trade barriers, including production quotas, guaranteed prices and import tariffs, impart a significant degree of distortion to international prices. The relatively longer plantation cycle, coupled with restrictive trade practices, has imparted a fair degree of volatility to sugar prices. In India, sugar production follows a three-five year cycle. Higher production leads to increased availability of sugar thereby declining the sugar prices. This leads to lower profitability for the companies and delayed payment to the farmers. As a result of higher sugarcane arrears, the farmers switch to other crops thereby leading to a fall in the area under cultivation for sugar. This then leads to lower production and lower sugar availability, followed by higher sugar prices, higher profitability and lower arrears and thus the cycle continues.

The production of sugar is seasonal. Sugarcane is crushed from November to April. The critical growth driver for the industry is consumption based on the population growth rate. The supply of sugar is dependent on a number of factors including sugarcane production (area under cultivation, yield), sugarcane utilisation for sugar production, duration of the sugar season, sugar recovery rates and cane pricing

Due to this cyclical nature, sugar manufacturers are vulnerable to industry oscillations. However, sugar by-products like molasses (ethanol, ENA and rectified spirit) and bagasse aid the sugar producers in diversifying risks and lending stability to their revenues.

It is also important to look at the P/E (price to earnings multiple) which the company is trading at vis-à-vis its peers. Companies with an integrated model, larger capacities, better relations with farmers, contracts with power and oil companies will most likely be trading at a premium to peers based on these parameters. If so, then one has to gauge whether that premium is justified. Stocks trading at an unrealistic premium will not be a good option to invest in. After all, valuations have to justify the company’s growth prospects.
Above all this, look at the past record of the management, its vision and its integrity. The management is responsible for the survival of the company and enhancement of the shareholders’ return. If the management has a track record of being on the sly or slow to react to market conditions, then even if the company is the largest or the most efficient, it may not give you your rightful share of the company’s growth and profits

BEST SUGAR STOCKS

1.SHREE RENUKA (stock made a high of 123.5 in early 2010 and made a recent low of 51.5 ...currently trading @71.5)
2.BAJAJ HINDUSTAN(made a high of 247 in early 2010 and a recent low of 100 rupees currently trading @120)
3.BALRAMPUR CHINNI(made a high of 168 in early 2010 and a recent low of 70 rupees currently trading @84)

stocks were hammered so badly as a result of the news that production would surpass demand in india(cycle reversed) and also the world sugar index fell from 30.4 levels to 14 ....so investors should be vigilant about seasonal stocks and buy them @ the right time and wait for the cycle to turn (in the short term investors can wait for further dips to enter into sugar stocks)