Why recent spurt in sugar stocks?
It was at the end of April this year that the sugar stocks picked up their pace and by mid-June, many of them had hit new 52-week highs. So, the big question is what drove this rise in prices and whether the bullish trend is sustainable or not? Let us try and solve this puzzle with the help of some macro-economic factors at play and industry-specific growth opportunities.
Let us look at the top three sugar companies in India by their market capitalisation. The first one is EID Parry (India), which was trading at Rs 320 levels in April-end and took a huge jump to reach a new high of Rs 470 by June-end. Balrampur Chini Mills took a flight of nearly 45 per cent in those sixty days, creating a new 52-week high of Rs 370. The third one is Shree Renuka Sugars, which was trading at around Rs 10 in April-end, and in just two months, the stock more than quadrupled; thereby, creating new highs. This was the bullish momentum that has been building in most sugar stocks. Now, let us look at the story behind it.
The sugar industry is the second-largest agro-based industry in the country. According to International Sugar Organisation (ISO), India was the largest sugar producer in the world, followed by Brazil in 2019. Also, the global sugar output is on a declining path, which saw a reduction of nearly 90 lakh tonnes in 2019. The current leading sugar producer - Brazil is expected to produce lesser sugar by nearly 70 lakh tonnes in FY21. And India is expected to have surplus stock with a total production expectation of 300 lakh tonnes and domestic consumption of nearly 260 lakh tonnes. This is one positive note that is driving the stock prices.
Another big story is of the by-product that sugar companies are increasingly producing, which is ethanol. Around 20 lakh tonnes of sugar is expected to be diverted towards the production of ethanol. Ethanol is used by oil marketing companies to blend in with the fuel. Currently, the average ethanol blending rate in India is around 7.2 per cent. The government has set a target of blending 20 per cent ethanol into the fuel by 2023, which comes as a great opportunity for the sugar companies in terms of boosting their revenues and strengthening fundamentals.
The bagasse-based co-generation also has played a crucial part in forming fundamentals.
For the last decade, the sugar production in India has been greater than the domestic consumption except for 2016-17. The sugar industry, which is traditionally considered as cyclical, might turn out to be non-cyclical with the revenue generation through ethanol segment, given the surplus sugar production.
The global prices are benefitting the sugar industry and it is well-prepared to meet its export target of 60 lakh tonnes this sugar season. With global supply shrinkage, the next season may look promising as well in terms of export.
However, it would be sensible to carefully watch out for further price changes. The stocks have rallied at a sweet speed so far, but will this trend continue or not, only time will tell!