New Tag - Rally Buster

Rally Buster. This is the new tag on my blog. It relates to a spooky rumor or news item that pulls the plug on a rally in the stock market. Sugar has been rallying for quite some time because of huge demand (22 million tons) – supply (15 million tons) gap in India. The rally has extended to the US and European commodity markets too because of the news that India, world's most avaricious consumer of sugar is facing this huge a deficit and is in a mood to import in bulk.

Meanwhile, the sugar companies in India were operating nowhere near their full capacities because the raw material (sugar cane) is in short supply. Then we have the socialist mandate of levy sugar (10% production of each sugar mills to be sold to government at Rs.12 per kg even as the going market price is Rs.30 plus) to be supplied by the mills before the rest can be sold in the open market.

Constraints, constraints, constraints for the sector. As if all this is not enough, today the sugar daddy and others in the cabinet have met up to discuss raising the levy sugar quota from 10% to 25% of production to bring down the spiraling sugar prices.

That busted the rally to some extent. The sugar stocks tanked between 4%-8%. The Economist can talk of Astonishing Asian rebound. Given the rally busting tendencies of our policy makers, they may not have to spill much ink on the topic !

Rip the control freaks; they ran out of arguments

Nice argument in Business Standard editorial seeking sugar decontrol.
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Why should the cabinet put on hold the proposal to free up sugar supplies by the food and consumer affairs ministry? What are its concerns?

Do they fear rise in sugar prices fueling inflation that is already high? Think again. The 11 million ton carry over from last year’s record production covers 55% of our annual consumption of 20 million tons. Even if the acreage under cultivation drops, it’s absurd to assume that it would drop over 45% - especially at a time when sugar is turning a multi-use crop needed for production of ethanol and even power generation beyond just sugar and alcohol. Decontrol in fact, allows sugar mills to press more supplies from the buffer stock into the market that will help push the prices further down, not up.

Will decontrol make PDS sugar costlier because state governments will have to buy from open market when levy is abolished? Not at all - since the proposal recommends central government to compensate the state governments by subsidies that was so far being borne unjustly by the sugar producers instead of the government. It will also eliminate the arbitrary price determination by central /state governments that often doesn’t consider market realities and result in expensive litigation.

I add one more point. How long can governments mask economic realities? Prices crash during times of over production and will creep back up when there is a shortage. It happens with Gold, Steel, Cement, Paper and all commodities. Any attempt to artificially control prices will only lead to manipulation and corruption. Why have the illusion of control and not just let go? We had controlled petrol, diesel, fertilizers and sugar and still we got a double digit inflation. So why harp on to something that is fast running out of arguments?

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Hoping for a long and sugary walk

Food Prices are soaring. There is a raging debate on bio-fuel v. food production – held responsible for global food shortage.

Philip Bowring in IHT asks why the price of sugar has slumped 20% globally, when those of all other food crops have gone up? He tries to establish a connection between the high price of corn and the low price of sugar. U.S. tariffs, tax breaks and subsidies keep Brazilian ethanol out of America while promoting the production of corn-based ethanol and corn syrups as a sugar substitute. This not only pushes up the global price of corn - the leading exporter of which is the United States - it also drives up the price of wheat, soybeans and other crops as well.

He urges people that ask why world agriculture is in such a mess - and explains why all the talk about "bio-fuel v. food production" misses the point - to start with sugar. Few commodities are more traded around the world. Yet none is subject to quite so many distortions due to subsidies, price controls and special arrangements. With oil prices sky-high and demand for bio-ethanol rising, surely the cost of sugar should also be going up. It is the largest source of bio-ethanol production, accounting for a big chunk of output from the world's largest sugar producer, Brazil. Sugar from cane is not only a cheaper source of bio-ethanol than most alternatives; it also leaves a smaller carbon footprint.

I too am pretty much *kicked* on sugar. My portfolio is heavily laden with sugar stocks (that is disclosure for you!). My reason – any industry stomped down too hard is sure to get back even stronger. Government has been singularly inhospitable towards this industry and that gave me an opportunity to buy into stocks of sugar companies that's been scraping at the bottom for over couple years now. You can find my views in a series of posts in this blog about the shifting fortunes of Indian sugar industry pretty much on the same lines as Bowring, griping at excessive regulation in the sector. Why, I had even suggested a Sheikh Squeeze strategy if Bush or somebody say global food crisis is because Indians eat more.

And when sugar stocks pull back, I’ll be laughing my way to the bank. I hope that will be one pretty long, enjoyable sugar sweet walk!

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"Let go off all controls, Sardarji (and Pawar boy)"

Why do I welcome decontrol of sugar? Because I have a huge position in sugar stocks in my portfolio :)

That aside, here I found a great ally in that argument. The ET editorial goes controls hurt farmers and industry too. It says our sugar sector has to be freed because –

a) Nearly every aspect of the sugar economy is controlled, often on mistaken assumptions.

b) Ill-timed policies – The govt. banned exports of sugar in 2006 when the global prices were high. That led to a local glut and non payment of farmers’ dues. Govt. can’t fix high cane prices (inputs) and seek to keep product prices low (output) as well. How will the mills pay the farmers?

c) Outdated inflation index - Sugar has to figure low in the inflation index because it is no longer an important household expenditure item. Bulk of the sugar consumption is in the industrial sector. Remove it from the list of essential commodities and treat it like any other product.

d) Meaningless restrictions - Remove distance restrictions between mills. It helps competition and results in efficient price discovery.

e) Lifeline for moneylenders - The statutory minimum price (SMP) for sugarcane and the higher state advised price are fine in theory but do not necessarily protect the farmers. If the mills don’t make profits, they can’t pay farmers on time. This tempts them to get the cane receipts discounted in the market, leaving the local moneylender to make the most of the situation.

So, Dr.M.M.Singh and Pawar boy should sit together and let go of all controls. This is one industry where there is no wastage. Bagasse is used in power generation and molasses is used to make alcohol. Then you have ethanol to mix with petrol to lessen the import bill on crude oil that is inching towards $120 a barrel.

So do it quick. I’ve tipped sugar to my readers earlier. Let me feel like a king :-)
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"Happy Birthday, Krish" - with love from PMO

Felt really sweet this morning. Here is why. The best birthday gift from the Government of India. Finally they chose to free sugar industry from its clutches of control. Hope it comes through.

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The liberalisation will mean mills will be able to sell sugar freely in the market. With no cane area reservation, no price controls, no levy obligations, mills will benefit from a direct link between the prices of cane and sugar. The matter is now under the consideration of Prime Minister Manmohan Singh.

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I see sugar stocks gathering momentum. Precisely the moment I've been waiting for ! If you'd listened to my earlier missives, you too should rejoice :) If not, go buy sugar stocks now. My fave is KCP Sugar Industries. Super stock.

Here are my earlier takes. Have loads of fun - if you are well stocked up on sugar stocks as I am :)

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Little steps that matter

Forget the big sugar mills. They are busy fixing their forex gaffes with bankers. It’s the rural sugar farmers’ cooperatives that get innovative in their efforts to beat the glut.

Satara-based Veer Kisan Ahir Sugar Cooperative (VKASCL) has signed a MOU with the German bio-fuel company, Biogas-Nord, to set up the country’s first plant to produce CNG from spent-wash, a by-product. It is a semi-solid waste and its disposal is agony for sugar manufacturers. Biogas-Nord, aided by Elephant Equity PE fund plan to set up a Rs.27 crore plant to produce CNG equaling 7,000 liters of diesel per day. VKASCL will make available land, infrastructure and raw material for the project and, in return, Biogas-Nord will give 5 per cent commission to the sugar cooperative on total sales plus royalty on raw material.

Facing massive over-supply, sugar industry globally is in shambles. The only way to stay competitive is to invest in innovation, discover alternative uses for the crop – power generation, ethanol and biogas fuel production. The costly crude oil [$100+ a barrel] is clearly unaffordable, yet continues to power vehicles, run factories and heat up cold homes. With an oil guzzling world desperately searching for alternatives, every little step helps.
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Never play a stock ; Play the analyst...

Ok, scumbags. You didn’t listen when I tipped you in on Sugar stocks. Now grieve. No, I don’t look at fundamentals. I don’t look at technicals. That’s for friggin’ chartists who make a living by staring at computer screens and fooling the world with their harebrained forecasts that never come true. They work for an end of month paycheck and commissions. You and I bet our hard earned money on the stocks that these guys `think’ would go up… If you do, you’ll be getting out soon. Out of this game.

In India, you bet on politics. I always do. I bet on the minister. More influential he is, more loyal his voters are. That's why I tipped sugar stocks. Look at this “sweet” guy Sharad Pawar, Agriculture Minister. He answers my wish list to the T. I know how his mind works. I’ll share it with you. This guy loves just two things - the sugar belt of Baramati and BCCI, one of world's richest sports (Cricket) bodies. Let’s keep cricket out for the time being. The folks over there at Baramati, eat sugarcane for breakfast and molasses for lunch. They sleep on mats made out of cane leaves and wear sugar coats for dinner. They don’t drink water, they feast on cane juice. They all die of diabetes and the chemists there have made their fortunes just by selling insulin. The only thing they know is to vote this guy Pawar back to power. That’s it – isn't it simple enough? Either they are at the cane fields or at the polling booth. That's how they lead their lives. He will give us more of good news on Sugar because he needs those sugar coated votes. The folks at Baramati don’t vote if it isn’t dude Pawar’s name on the ballot. So I say, buy sugar stocks. As much as you can. I do. Never sell your sugar stocks so long as you got this Sugar Daddy at the top and as long as analysts keep talking it down. Sell them only if pawar man leaves the deck or when analysts talk it up.

Now mill owners, keep a steady supply of Ethanol even during weak season. Daddy will hike the blending ceiling from 10% to as much as you can make. He’s struck a deal with that Deora guy at Petroleum ministry. They’re on phone all the time. When they meet in public, they wink and nod a lot. Export subsidy? Granted. Kamal Nath won’t object. A deal there too. Co-generation ? Go ahead. Life’s good. That's my fundamental and technical analysis for you. What say you...?

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Don’t believe a word those friggin' analysts say. They all will trash a sector while their broking bosses are stocking up on it. When they’ve had enough, they’ll talk as if that’s going to be the next big thing. That’s when you should dump your stocks and rip those suckers.

Don’t play the stock. Play the fuckin' analyst. You heard me….!

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Bihar shows the way...

To attract investment in sugarcane-based industries, the state government amended the Bihar Sugarcane (Regulation of Supply and Purchase) Act, 1981, earlier this year, allowing sugarcane juice to be directly used to produce ethanol or rectified spirit and for co-generation of power. For sugarcane-based industries,the state is also offering a capital subsidy of 10 per cent of the investment, subject to a Rs 100 million ceiling.

Result –

Reliance Industries, Tata Chemicals, Bharti Enterprises’ Fieldfresh and Indian Oil are among several large companies that have evinced interest in leasing closed sugar mills that the Bihar government is offering, mainly to exploit opportunities to make ethanol to meet mandatory petrol blending norms that were introduced this year. Other companies that have acquired the request for qualification (RFQ) forms are public sector Bharat Petroleum and Hindustan Petroleum, and Renuka Sugars, Upper Ganges Sugar, Dhampur Sugar and India Glycols.

Closed for more than a decade, these mills together have a financial liability of Rs 700 crore under various heads and the funds raised by leasing them will be used to clear the liabilities. Last month, the Bihar government decided to offer 15 closed mills belonging to the Bihar State Sugar Corporation on a long-term lease of 60 years, extendable by 30 years, on the recommendation of SBI Capital Markets. Of the 15 mills, eight have been reserved for sugarcane-based industries such as sugar mills or distilleries for ethanol or alcohol production. The remaining seven can be used for industries that may not be sugarcane-based.

A pre-bid meeting is scheduled on December 8 in New Delhi.

Contrast this to what happened in UP that prompted me to send out a wish list. And we call Bihar backward…!
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Corporate Governance...? Mr.Damodaran, you must be kidding...

Remember Swaraj Paul…? The raider that stalked companies like Escorts and DCM in 1983…? It has indeed been the first such event that shook up the staid Indian promoters from their slumber, made them review their marginal holdings and think up defenses including issue of warrants.

Now Lord Paul’s then broker, Harish Bhasin is back in the game. He has taken the CLB route, alleging that the promoters of DCM Shriram Industries Ltd. are issuing warrants to themselves at (Rs.52) steep discounts without offering them to other shareholders. Each warrant entitles the holder to buy 3 equity shares. The advantage for the promoters is that they can just remit 10% of the price of the warrants and pay the rest over 18 months. If they find the share prices have zoomed, they will happily subscribe to the warrants at the earlier discounted price. ( Scope for raising debt to pay the remaining 90% by pledging the warrants that are in-the-money is easy, especially in these ultra liquidity times.) If they don’t, they just let the offer lapse. Is this corporate governance, Mr.SEBI chief…?

Mr.Bhasin, eyeing the huge land bank the company has at various locations, have challenged this and has come up with an Open offer to other shareholders (at Rs.70/-). This had prompted DCM promoters to react by raising the warrant prices (to Rs.90/-) by 75% at once (and extending subscription period by another 18 months, of course), meaning their still exists tremendous upside to the stock’s intrinsic value. Here's HB's latest counter offer (at Rs.120/-). The game is heating up... Given the fact that sugar industry is facing a mix of bad fortunes (supply glut, state administered prices, cane costs are higher than market price of sugar etc.), the stock prices have slipped a lot and what best time to shore up and consolidate? They know, bad times don’t last forever and for sugar, it's lasted long enough…

Dear Mr.Damodaran, if you are serious about enforcing corporate governance, let SEBI focus on the warrants game. That’s where there’s no transparency. The promoters issue warrants after passing a resolution u/s 81(1A) of the Companies Act, 1956 (notice that year…good lord !) which is a farce. Hardly 1% of the shareholders (in numbers) attend AGM and even postal ballots, nobody bothers to mail in. That’s clearly not working. I have a suggestion. Make it compulsory for warrant holders to pay up 50% of the issue price of warrants upfront and shrink the overlay period from 18 months to just 3 months. This would let in only serious players to take this route and will not permit share price arbitrage game.

Dear shareholders, I’ve been telling you guys to buy sugar stocks, now. Sugar business is cyclical and it’s on the cheap now. Most of the sugar mills carry large swathes of land that could be sold / developed in the current real estate boom. From hereon, I can see only upside for sugar industry since all things that can get worse, already has.

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Warren Buffet said, when others are fearful, you be greedy. In sugar stocks, you've a good reason to be greedy. Buy it. Buy it all… It’s not lost on you, just yet… Why let only promoters or a takeover raiders to make a killing? It'll be too late once the raid is launched. Be there, before the event....Will ya...? (Full disclosure : I and my family hold KCP Sugar Industries shares).

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[Update : Reader Dnyanesh has sent this link to an excellent article by Anil Singhvi on corporate governance. Thanks Dnyanesh.... Hat Tip !]

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Sugar Daddy

Want a play in power, go bet on sugar stocks...NOW !

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Cogeneration of power, still marginal in the government’s energy supply program, is set to become mainstream by 2017 – goes Prabha Jagannathan in The Economic Times.

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She quotes a recent KPMG report on the Indian sugar industry (Sector Roadmap for 2017) to drive home her point.

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The green energy opens up a $$ revenue stream too. Co-gen has proven revenue potential in the CDM (clean development mechanism) based carbon credits that apply to the sugar industry. The total carbon credit potential for 9,700 mw of exportable co-gen power is in the range of 48 million carbon credits per year, which is estimated at Rs 21.50 b ($53 m) per year.
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At its optimum potential, the industry can meet a good 6% of the additional power requirement by 2017 and generate almost 48 million carbon credits. Currently the total power capacity in India is 128 GW and the requirement is estimated at 306 GW by 2016-17. Against that, the current bagasse-based exportable power is estimated at 847 mw. This could go up to 9,700 mw by 2017, according to projections in the report, she says.

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If you find rollicking power stocks too expensive, go long on sugar - tommorrow's multibagger !

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Had we known earlier....

Politicians like tennis more because it’s a game that lets one get the second serve in. In most other games, there's no second chance. By seeming a lot like their business of law making, the sporty metaphor gives them something to lean on. First make a stupid law that defies all logic for some self-serving reason and unleash the damage on the masses. When the goals are met (or emphatically unmet, like a first serve gone wide), try and make amends.

Earlier this year, the Indian Government worried about rising inflation denting its image before the Uttar Pradesh (U.P) elections, banned exports of sugar in a year of bumper production (sugar has a higher weightage in the inflation index). Incidentally U.P also has a large area under sugar cultivation and is home to a number of sugar mills. The move flooded the commodity in the domestic markets and prices slumped. Revenues and stock prices of sugar companies that were star performers suddenly nose-dived and their market capitalization went down almost by 70-80%. Not surprisingly, the UPA candidates were trounced by Mayawati’s BSP at the U.P assembly polls.

Elections over, it was time for the Government to review the wreck and rollback. Here’s the latest “had-we-known-earlier” – for sugar industry. The sense of timing was immaculate - the industry as a whole and its investor community has had hemorrhage already.

Recently I met my friend Rahul, who tracks sugar industry for a living at a leading brokerage. The guy looked a lot younger than his usual plump, flabby self. Asked him what had worked – the Gym or the diet.

He gave a smile and said, “I really didn’t have to go that far. I get enough exercise just pushing my luck.” I believed him.

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