In sweet spot! Sugar stocks rally up to 13%. Here’s why

Sugar stocks jumped over 13% on the NSE on Thursday on the likelihood of a 14% fall in sugar output in Maharashtra in the 2023-24 crop year.

Dalmia Sugar was the top gainer, while Dhampur Sugar, Avadh Sugar & Energy, Balrampur Chini Mills, Rana Sugar, Shree Renuka Sugars, The Ugar Sugar, Dwarikesh Sugar, Eid Parry and Triveni Engineering & Industries rallied 6-12%.

Sugar stocks have been gaining lately on concerns over production in the wake of weak monsoon in the growing areas. Maharashtra, which is among India’s top-producing states, has been at the receiving end of the monsoon witnessing the driest August in more than a century, according to industry insiders and government officials as reported by Reuters.

“Sugar mills are worried that production could fall sharply in the new season because of drought. They are not willing to sell at lower prices,” the report said, quoting Ashok Jain, president of the Bombay Sugar Merchants Association.

Higher prices will, however, improve margins for producers such as Balrampur Chini, Dwarikesh Sugar, Shree Renuka Sugars and Dalmia Bharat Sugar, helping them make payments on time to farmers, dealers said.

Sugar output could fall by 3.3% to 31.7 million metric tons in the new season starting from October as low rainfall hits cane yields in the western state of Maharashtra and Karnataka in southern India, which together account for more than half of total Indian output, a leading trade body estimated, the report mentioned.

Although sugar prices rose to 37,760 rupees ($454.80) per metric ton on Tuesday, their highest since Oct. 2017. Indian prices are nearly 38% lower than the global white sugar benchmark.Jain fears a curb on sugar exports by the government in the event of demand-supply issues.

India allowed mills to export only 6.1 million metric tons of sugar during the current season to September 30, after letting them sell a record 11.1 million metric tons last season.

Brokerage firm DAM Capital in a note said that the sugar inventory in the country has been at the lowest level of 4.5 mt in the last five years. This has resulted in an uptick in domestic sugar prices by Rs 3-4/kg from April 2023.

The Fast developing El Nino conditions are likely to result in a decline in net sugar production by 4 mt 12%, specifically in Maharashtra and Karnataka, the note said adding that this would keep domestic sugar prices firm for the next one year.

While production is not the only reason that is aiding the price uptick. The government’s focus to increase ethanol blending with petrol from 1.5% in 2018 to 11.5% in 2023 over the past five years has supported the sugar prices and its targets to increase blending to 20% levels by 2025-26 will give more fillip to the cause, DAM said.

It sees UP-based sugar companies are expected to witness strong earnings growth for the next two years on sustainable sugar production in UP, higher sugar prices and increasing utilisation of new distillery capacity.

Stock recommendations by DAM

— Balrampur Chini: Buy | CMP: Rs 416 | Traget: Rs 510 | Upside: 23%

— Triveni Engineering: Buy | CMP: Rs 355 | Traget: Rs 415 | Upside: 17%

— Dalmia Bharat Sugar: Buy | CMP: Rs 426 | Traget: Rs 540 | Upside: 27%

— Dwarikesh Sugar: Buy | CMP: Rs 93 | Traget: Rs 120 | Upside: 29%

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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