In addition to the poor availability of cane, the selling price of sugar has come under pressure following large-scale imports. In many cases now, the average contribution from sugar crushing is just a rupee per kilo. Given thefact that sugar companies are drawing down on stocks has only increased the per-tonne cost of production. This was clearly brought out from the Dhampur results. For the first three quarters of 1997-98, Dhampur Sugars reported a profit of Rs 13.21 crore, but during the last quarter during which there was no crushing, the company posted a loss of Rs 17.4 crore. The company has a co-generation power plant, but since the crushing unit was inactive, there could not be any co-generation of power either.

In comparison, the next period, which is October to March 1999, should be much better as this is when the crushing season begins, thus reducing per-tonne costs and improving contributions. But the good news ends here. Given the buoyancy in sugar prices last year, the area under cultivation has been increased greatly. Against a production of 12 million tonnes of cane last year, and a total consumption of 14 million tonnes, the expected production this year (1998-99 season) is 15 million tonnes. If cane productionlevels are higher than this figure, it could spell trouble for sugar companies as average prices will decline further from the current Rs 12.5-13 per kg. The only benefit in such a scenario will be if the government decides to lift the ban on export of sugar, but this will only benefit sugar companies like EID Parry or Thiru Arooran Sugars that have access to ports. The Dhampur Sugar stock, however, has been hitting new lows as investors prefer to play it safe and exit from the stock.

SBI rating

Even the strangest of media reports have the capacity to move stocks. Reports that the State Bank of India (SBI) has pierced the sovereign ceiling and obtained a rating higher than that of the government of India's foreign-currency rating improved the sentiment for the stock, though only marginally. But this report has to be viewed with a lot of skepticism for it suggested a comparison between the domestic rating for the bank and the foreign-currency rating given to the government of India and to thedevelopment financial institutions (DFIs), which is illogical. Besides, the SBI's domestic rating is one notch below the centre's domestic rating of BBB.

In reality, S&P has simply maintained its outstanding rating for SBI's domestic debt at BB+. Recently, DFIs like ICICI, IDBI and even PSU banks like BoB have had their foreign-currency outlook reduced from stable to negative (all three are rated at BB by S&P), and could even come in for a re-rating. However, the stock market seems to have taken heart from such media reports. The result was that the SBI stock traded a couple of rupees higher than its previous close.

The incorrect interpretation notwithstanding S&P's reaffirmation of SBI's rating has not offered something new to the market in terms of information. The SBI stock was always better discounted as compared to the other financial-sector stocks, commanding the highest price-earning multiple, as it was always perceived to be a very strong entity. A similar sentiment was put forward recently whenS&P lowered the outlook for ICICI, IDBI and Bank of Baroda to negative. But after a knee-jerk reaction, these stocks have picked up once again.

The improvement in sentiment has come at an opportune time for the SBI stock that has been drastically re-rated by the market. The reason for the re-rating was that at the time of the current year's half-yearly, results the bank's chairman had painted a bleak picture for the second half. The bank will be making higher provisions for NPAs. It will also have to pay higher wages following a new wage agreement with its unions.