Sugar stocks have been seeing a rally of their lifetime, as rising international prices and increased demand for ethanol from oil market companies (OMCs) have raised their outlook. In the last one month, these stocks have surged up to 90 per cent.
Shares of Avadh Sugar & Energy, Magadh Sugar & Energy,
Mills, Triveni Engineering & Industries, Ugar Sugar Works, Rana Sugars, & Industries, Industries, DCM Shriram Industries, KM Sugar Mills, Mills and Dhampur Sugar Mills have gained 50-90 per cent in last one month. Not a single sugar stock has delivered negative returns for this period.
What is leading the rally?
Market commentators say there are basically two reasons for the rally. Sugar stocks, which earlier gained attention when the government changed export rules for the commodity, are today benefiting from the rise in global prices as well as domestic demand for ethanol, a sugar industry byproduct.
Domestic sugar prices have risen 7-8 per cent in the past one month, mainly due to high summer demand and the end of the crushing season, reflecting no surprises on the sugar production front. Global sugar prices are also on the rise, with a 15 per cent jump in the last two months.
“We believe domestic sugar prices would remain above Rs 34 a kg, given the aggressive exports and diversion of sugarcane towards ethanol production. The current raw and white sugar prices are above the cost of production for the Indian millers,” said Sanjay Manyal, an analyst at ICICIdirect.
Manyal believes global raw sugar prices can easily cross 20 cents per pound level in the next six months as Brazil is expected to witness a 20 per cent drop in production in the 2021-22 season. This would ensure sustainable export dynamics next season, putting Indian millers in a sweet spot.
Indian Sugar Mills Association in a release said 54-55 lakh tonnes of contracts have already been entered for sugar exports so far, which is more than 90 per cent of the total export quota under the government’s maximum admissible export quantity (MAEQ) programme for 2020-21.
Out of this, over 35 lakh tonnes have already been exported and 8-10 lakh tonnes of sugar are expected to be physically exported in May 2021.
This happened when sugar mills have been crushing more sugarcane than last year, which means demand has been higher to sustain the price rise as supply increases.
Another factor driving the rally in sugar stocks has been the ever-increasing demand for ethanol for blending into fuel. As per the association, sugar mills have signed contracts to supply 302.3 crore litres of ethanol to the OMCs, registering a 70 per cent YoY jump.
The country, on an average, has achieved a blending percentage of 7.36 per cent, while 11 major states like Uttar Pradesh, Maharashtra, Karnataka, Uttarakhand, Bihar, Haryana, Punjab, Delhi, Goa, Gujarat and Himachal Pradesh have achieved even higher blending percentage of up to 10 per cent, the association said.
That still falls short of the government target of 20 per cent blending in petrol, signalling plenty of room for growth. “What has changed in the last one year-and-a-half is that one needs not produce sugar to yield ethanol. Earlier, you had to crush sugarcane no matter what the demand for sugar was. But now, because ethanol demand is higher, mills can make only ethanol, and not sugar. They have a choice today. This way they can even control the inventory,” said Ambareesh Baliga, an independent market analyst.
How much can these stocks rise?
The rapid surge in sugar stocks has been eye-popping. Some analysts believe this may continue for a while as they have a history of underperformance for a long time. Hence, the changing environment and cheaper money are attracting investors.
The rally “should continue as the stocks were not much looked into and the outlook is now improving in domestic and international markets. So the Indian sugar industry will benefit a lot from this,” said Vinod Nair, Head of Research at Geojit Financial Services.
Some analysts have turned cautious. Baliga said even though these stocks have surged, there is not much liquidity in them.
“The way the sugar stocks have shot up, the momentum can carry on a bit longer if one were to look at the market. There is a limit to the upside and there is no doubt about it. I am a bit cautious,” he said.
