Supply shocks add more fuel to sugar stocks’ rally

Mumbai: Sugar stocks were in a sweet spot on Tuesday as raw sugar prices touched their highest level in over four years due to a fall in supply. Availability has been hit due to reduced production in Brazil, the biggest global producer of the sweetener and ethanol.

Reports also suggested that the Indian Sugar Mills Association has written to the Prime Minister's Office to immediately increase the minimum sale price of sugar to at least Rs 34-Rs 35 per kg from Rs31 per kg to help it clear pending sugarcane dues ahead of the new crushing season that will start from October.

Magadh Sugar, Uttam Sugar Mills, Rana Sugars, Bajaj Hindusthan Sugar, Balrampur Chini Mills, Simbhaoli Sugars, Mawana Sugars, Dalmia Bharat Sugar & Industries, Sakthi Sugars, Dhampur Sugar and Shree Renuka Sugars gained 2-5%.

Experts said that this season, Brazil-based integrated manufacturers are going to divert more cane toward ethanol as compared to last season. Also, cane in Brazil has a lower yield this year because of adverse weather conditions. India has 6 million tonnes of surplus sugar. At this price, Indian companies can export a good amount of sugar with limited government support, said experts.

"Based on the strong visibility over ethanol blending, current oil prices and very good ethanol prices given by the Indian government, and current sugar situation in Brazil, sugar prices in India are expected to hold up and companies will make money on both sugar and ethanol side," said Kunal Mehta, research analyst at Vallum Capital. "Companies are displaying strong commitments in expanding distillation capacities and reducing the share of sugar division in overall profits. Valuations are still at good prices."

In the last one year, sugar stocks have gained sharply and besides fundamental reasons, the rally in small-cap stocks has also been a driving factor. However, experts see more legs to this rally.