At a time when most sectors seem to be moving at an unhurried pace, sugar stocks decided to throw a party of their own, and investors were more than happy to join in. What is usually seen as a slow, seasonal, unglamorous commodity space suddenly became the most talked-about corner of the market.
Sugar stocks extend rally
Bajaj Hindusthan Sugar was among the biggest movers, gaining around 9% in intraday trade. Dwarikesh Sugar Industries rose more than 6%.
Shares of Shree Renuka Sugars, Bannari Amman Sugars, DCM Shriram Industries and Dhampur Sugar Mills were trading 3-5% higher.
Triveni Engineering & Industries, Uttam Sugar Mills and Avadh Sugar & Energy also remained in demand, rising around 2-3% during the session.
Beyond sugar: The 36% margin “hidden gem” inside Triveni Engineering set for a 3:1 demerger
A quick look at the sugar sector stocks indicates that overall, many stocks have rallied as much as 20% or more in the last 1 month. This is after ex-factory sugar prices have risen to around Rs 5,300 per quintal, in Maharashtra. The price has reached around Rs 5,550-5,600 per quintal, if you add the current GST rates on them..
Why are sugar prices rising?
Financialexpress.com spoke to market experts to understand what is driving the sharp rally in sugar stocks, how higher sugar realisations could affect margins and which stocks investors should keep on their radar.
According to Sunny Agrawal, Head of Fundamental Research at SBI Securities, the current rally is being driven by tighter demand and supply conditions. He noted, “Tightness in the demand-supply situation has led to firming up of sugar prices and this augurs well for all the sugar mills. Sugar millers will benefit on account of the recent surge in sugar prices as they are sitting on sugar stock at significantly lower cost (around Rs 37/Kg vs current ex-factory realisation of Rs 54-55/kg in UP & Rs 46/kg in Maharashtra).”
This is important for mills that are still holding inventory produced at lower costs.
If those stocks are sold at significantly higher prices, realisations can improve and provide a near-term boost to margins.
Sugar industry: Ethanol price impact
There is another factor supporting sugar prices. Higher sugar exports and diversion of sugarcane towards ethanol production are expected to impact the demand -supply matrix.
Sugar mills can use part of their sugarcane to produce ethanol instead of sugar. So, when cane is diverted towards ethanol, there are apprehensions about the actual sugar output .
Agrawal pointed to another benefit adding, “The surge in sugar prices will help them mitigate margin pressure in the ethanol division where there has been no price hike for the last 3 years.”
Ethanol is an important part of the sugar industry’s business. But stagnant ethanol prices have limited the ability of mills to offset rising costs.
The big sugar sector bets now
With the sector rallying, investors may naturally ask – which stocks stand out?
SBI’s Agrawal has three preferred names. He said, “Our preferred bets in the sugar segment will be Balrampur Chini, Trivenni and EID Parry.”
The analyst, however, also highlighted a key risk.
“The government has allowed limited duty-free import of 1 million tonnes of raw sugar to temper the rising sugar prices. Investors should note that any government intervention can lead to correction in sugar prices and hence pursuant correction in the stock prices of sugar cos. Hence, one should adhere to proper SL,” said Agrawal.
The concern, however, is whether we are seeing a structural change in the fundamentals of the sugar industry. Poonam Upadhyay, Director at Crisil Ratings, said the recent jump in sugar prices is largely linked to tightening inventories ahead of the next crushing season.
“The recent spike in sugar prices reflects tightening inventories ahead of the next crushing season rather than a structural shift in market fundamentals. While mills holding inventory stand to benefit from higher realisations in the near term, the gain is likely to be transient and confined to the period before fresh season supplies reach the market,” added Upadhyay.
Upadhyay further noted, “The current rally is expected to provide only a temporary lift to operating margins, with benefit likely to moderate as supply conditions ease.”
That makes the next crushing season crucial.
Government may allow duty-free sugar imports
According to sources cited in a Financial Express report, the government is considering limited duty-free sugar imports to prevent a sharp rise in prices ahead of the festive season, when demand typically increases between August and November. It is also looking at measures to limit stocks held by bulk traders and improve inventory checks.
Higher imports could increase domestic availability and put pressure on sugar prices, which may limit the benefit mills are currently getting from higher realisations. The government has also imposed stock limits on sugar dealers until November 30 to curb hoarding and speculative trading.
Report by Olivia Kunjumoon
Source: Financial Express
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