Boom in Sugar Stocks and Future Prospects

Growth picks up after the government announced the increment of Rs 5 in sugarcane FRP

Boom in Sugar Stocks and Future Prospects
Boom in Sugar Stocks and Future Prospects
Harsh Kumar - 30 August 2021

The recent surge witnessed in the prices of sugar stocks is not expected to last longer and the party may come to an end due to the cyclical nature of the sector. The expected scarcity of the commodity in the world market, beginning the new sugar season from October 2021 till September 2022, will also have no favourable impact on the prices of sugar stocks, opined experts.

Ratings and economic research major, Credit Rating Information Services of India Limited (CRISIL), in its recent report predicted that the world's largest sugarcane producer is facing inclement weather which is affecting sugar production in Brazil. As a result of this, global supply is expected to impact the upcoming sugar season (SS 2022; October 2021 to September 2022), which will directly raise the Indian export of sugar in the world.

Notably, Brazil is expected to produce just 29 million tonnes of sugar in SS 2022 as against 41 million tonnes in SS 2021. India is the second-largest producer of sugarcane in the world and according to the CRISIL report, the country is expected to export over 7 million tonnes of sugar by end-SS 2021. Moreover, global white sugar prices have started rallying at the beginning of August and had reached a four-and-a-half-year high of $504 per tonne as of the seventeenth of the month, up 28 per cent on-year, the CRISIL report said.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services believes that buoyancy in sugar stocks will not sustain for a longer period. He said, “When the sugar sector faces headwinds, as the price of sugar shares are hammered. Sugar stocks are good for trading but not for investment, due to the cyclical nature of the sector.”

“Sugar stocks do not give consistent returns from the investment perspective as sugar companies make a profit when the prices of the commodity go up and this happens when the crops are damaged or in any event of crop failure, particularly to the largest producers like Brazil. To overcome the crop damages, the Indian government gives MSP to the sugar cane growers (farmers), which helps them to grow the crop in the next season. As a result, we have bumper production of both sugar cane and sugar. This glut affects the sugar prices and the profitability of the sugar companies” he added.

Present Status of Stocks

On 27th August 2021, Balrampur Chini had a stock price of Rs 370, Dhampur Sugar was at Rs 312, and Triveni Engineering was at Rs 169.45, while Shree Renuka Sugars had Rs 26.25. Dalmia Bharat Sugar and Industries has Rs 434 and Bajaj Hindusthan Sugar is on Rs 14.65.

In the last three months, sugar stocks such as Balrampur Chini have witnessed a 24.14 per cent of upsurge, while Dalmia Sugar records 34.71 per cent. At the same time, Avadh Sugar gained 44.2 per cent of rising and Sakthi Sugars noted 31.67 per cent. Moreover, Shree Renuka experienced a 55.06 per cent rise in its stocks shares.

Other Factors Affecting the Sugar Sector

After the crucial meeting of the Cabinet Committee on Economic Affairs (CCEA) on Wednesday, 25th August 2021, the Government of India has set the price of sugar cane which mills have to pay to the farmers is now Rs 290 per quintal for 2021-22 marketing year (October-September).

Experts indicated that the new rise in FRP by Rs 5 per quintal will also not have any serious impact on sugar stocks, as this is largely in the expected line.

"The central government's decision to hike the minimum price that mills pay to farmers by Rs 5 a quintal is marginally positive for farmers and farm workers. But since the government has refused a rise in the price at which mills can sell is a dampener. From the market perspective, sugar stocks undergo cyclical ups and downs. But they were never consistent compounders or long-term wealth creators,” Vijaykumar said.

To boost India's energy security, the Government of India has set the target of blending 20 per cent ethanol in petrol by 2025. Ethanol or ethyl alcohol is an essential industrial chemical; it is used as a solvent, in the synthesis of other organic chemicals, and as an additive to automotive gasoline (forming a mixture known as gasohol). Ethanol is produced from molasses, a by-product of sugar manufacturing. At present ethanol blending in the country is to the tune of 8.5 per cent and is slated to rise to 10 per cent ethanol by end of 2021-22.

An increase in the use of ethanol will directly reduce the import of petrol which will directly help save foreign exchange of more than Rs 30,000 crore.

Interestingly, India spent 101.4 billion US dollars on crude oil imports in 2019-20 and 111.9 billion US dollars in 2018-19. Notably, India has an ethanol production capacity of 684 crore litres. For the targeted 20 per cent blending of ethanol in petrol by 2030, the country will need a 1,000-crore litre capacity.

Ethanol is likely to solve the problems of sugar mill owners, and that will directly be beneficial for sugar stocks. The revenue generated from the sale of ethanol by mills helps sugar mills in clearing cane price dues of farmers, as more demand for ethanol will increase within the time in the auto sector. Also, that will be made increment in revenue of mill owners which will directly benefit the sugar stocks.

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