Healthy outlook: Investors show their sweet tooth for sugar stocks

Shares of several firms rally between 15% and 20%

Shares of sugar companies were on a roll at the bourses on Monday, with Bajaj Hindustan, Dwarikesh Sugar Industries, Dhampur Sugar Mills, Avadh Sugar & Energy, Uttam Sugar Mills, and Dalmia Bharat Sugar and Industries rallying between 15 per cent and 20 per cent on a healthy outlook.

Triveni Engineering & Industries, EID Parry, Shree Renuka Sugars, and Balrampur Chini Mills gained in the range of 10 per cent12 per cent. In comparison, the S&P BSE Sensex ended 63.84 points, or 0.13 per cent, lower at 48,718.52.

Most brokerages have a positive stance on India’s sugar industry as it appears well poised to benefit from global and domestic factors. Lower output from countries like Brazil, Thailand and EU nations would keep supplies tight and global prices firm, enabling India to increase exports. On the domestic front, favourable policies, rising ethanol demand (blending target of 20 per cent by CY25, from 8 per cent currently), and aggressive ethanol capacity addition would likely drive earnings.

Domestic sugar prices have increased 7-8 per cent in the past month mainly due to high summer demand and crushing season getting over reflecting no surprises on the sugar production front. Analysts at ICICI Securities believe domestic sugar prices will remain above ~34 a kg, given aggressive exports and diversion of sugarcane towards ethanol production.

Global sugar prices are also on the rise (around 15 per cent in two months). The current raw and white sugar prices are above the cost of production for Indian millers. "We believe global raw sugar prices can easily cross 20 cents/lb in the next six months, given Brazil is expected to witness a 20 per cent production decline in the 2021-22 season. This would ensure sustainable export dynamics in the next season, as well. We believe India’s sugar inventory levels would come down to around 7 million tonnes (MT) by September 2022," the brokerage firm said.

The harvest season has commenced in Brazil and initial trends point to a lower crop yield, owing to less sowing and unfavourable Monsoon conditions. Sugarcane yield is likely to drop this season and its quality also is likely to go down, which can impact recovery rates in Brazil.

As a result, "we expect Brazil’s millers to restrict sugar production this year. With some other key sugar-producing countries, such as Thailand, and the EU not expected to produce higher output, we believe the global demand-supply scenario to remain tight. Global commodity traders expect at least a 10 per cent drop in sugar output in Brazil to 34-35 mt. Hence, international sugar prices have started to firm up and crossed 16.5 cents per pound. This augurs well for India’s sugar industry, which has a surplus inventory of 10.5 mt," analysts at Elara Capital said in the sugar sector update.