Investor's Eye: Update - SBI (SBI Amendment Bill to make fund raising easy); Sugar (Sugar stocks put on Hold)

 

Investor's Eye [March 09, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE State Bank of India     Cluster: Apple Green Recommendation: Hold Price target: Rs2,460 Current market price: Rs2,044 SBI Amendment Bill to make fund raising easy The Lok Sabha gave a ?go-ahead? to the SBI Amendment Bill recently. The bill is aimed at allowing flexibility to the State bank of India (SBI) in terms of capital raising. The salient features of the bill are: The government shareholding in SBI can now be reduced to a minimum of 51% from the previous threshold of 55%. SBI will be permitted to float preference shares to raise long-term funds, place equity with financial investors and come out with bonus issues to its shareholders. The eventual passage of the bill would allay the concerns related to the bank?s ability to raise capital for funding its balance sheet expansion. At the current market price of Rs2,044, the stock trades at 9.8x FY2012E earnings per share and 1.6x FY2012E book value per share. We maintain our Hold recommendation and price target of Rs2,460 on the stock. SECTOR UPDATE Sugar Sugar stocks put on Hold Key points International sugar prices in correction mode: Internationally, the price of white sugar (also raw sugar) has witnessed a 20% correction to $590 per tonne in the past few weeks. We believe that while the key near-term reasons behind the correction have been the deferment of purchases by importing nations and profit booking, expectations of significant easing of the global deficit in the sugar year 2011 (SY2011) also looms large on investor psyche.  Indian sugar prices follow import parity: Following the global prices and aided by the government measures to control sugar prices, the prices in India have also corrected by approximately 23% from the highs of January 2010. We believe that with the domestic production estimated to increase by about 25% year on year (yoy), though India?s import dependence in SY2011 would be lower than that in SY2010, the domestic prices will still be determined by the import parity price.  Profits of sugar companies highly sensitive to prices: For the Uttar Pradesh based companies the average cane price paid this season has been Rs235-240 per quintal, implying a total production cost of Rs30-31 for per kg of sugar. However, the current lower realisation if sustained will lead to a dismal profit margin of Rs2-3 per kg (for free sale sugar) and a minimal net profit. Thus, we believe that the profitability of sugar companies is at big risk if the sugar prices fail to rebound from the current levels. Continue to advise caution, put stocks on Hold: We opine that while international sugar prices may witness a lull in the near term, further direction (of the international and thus domestic prices) will be gauged from the developments pertaining to the Brazilian crop (crushing to start by the end of March/April 2010) and the sowing data in India on which further clarity will emerge in April this year. However, we believe that in the current scenario, considering the high risks involved, investors would do well to keep away from sugar stocks.  Accordingly, we maintain caution on the sugar stocks under our coverage, ie Balrampur Chini Mills and Dhampur Sugar Mills, and downgrade these stocks from ?Buy? to ?Hold? while we keenly watch the developments in the sugar space. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions