MUMBAI: Morgan Stanley has downgraded Shree Renuka and Balrampur Chini to underweight.

It said higher production and cane costs and decline in international prices may cap the earnings of these companies.

Scrip                            Rating                   Target
Downside
Shree Renuka               Underweight       140      -23%
Balrampur Chini           Underweight        85        -22%

Shree Renuka
Higher production, cane costs, decline in international prices to cap earnings
Brazilian foray increases business volatility in near term
Stagnating realisations in distillery and cogen business another negative

Balrampur Chini
Higher production, cane costs, decline in international prices to cap earnings
Expect co to be negatively affected by sentiment surrounding lower sugar prices
Higher-than-expected domestic production to cap further upside
Earnings estimates for FY 2010 appear aggressive if international sugar prices trend lower

Reasons for underperformance
Higher-than-expected production in FY2010
Sharp decline in international sugar prices
Potential large sugarcane production in FY2011
Lack of incremental triggers, deep cyclical nature of commodity
Certain millers have imported sugar at relatively high prices
Panic selling may be seen on fall in domestic sugar prices combined with higher production
High cane prices in FY10, good weather may induce stronger production response

Recent developments
Indian Sugar Mills Association (ISMA) sees FY10 domestic sugar production at 16.8 million tonnes
ISMA estimates up from previous 15 MT
40% production increase means production will equal consumption
Demand-supply match would result in capping domestic prices

Quicktakes
Poor weather conditions in key cane growing areas
Poor weather may exacerbate fragile sugar balance, sparking fresh rally
Relatively low water table levels in certain parts of India limit incremental cane planting
Govt delays imports of 1-2 MT of white sugar
Govt delays may allow prices to rise on demand supply mismatch