Sugar stocks gain on export hopes, cut in ethanol GST

Mumbai: Shares of sugar companies were among the top gainers on Monday on news reports the government may allow higher exports in January.

The government's decision over the weekend to reduce the Goods and Services Tax (GST) on ethanol for blending with petrol to 5% from 18% also boosted sentiment. Ethanol is a biofuel derived from sugar.

Dalmia Sugar soared 14.3%, Dhampur Sugar jumped 11.7%, Bajaj Hindusthan rose 10% and Shree Renuka Sugar gained 5.2% on Monday.

"Sugar stocks are on the rise because of the likelihood of additional exports, possibility of more use of ethanol and recent strength in international prices," said Hemang Jani, head, equity strategy, broking and distribution, Motilal Oswal Financial Services. He is bullish on Balrampur Chini, Triveni Engineering and Praj Industries, an ethanol plant maker.

Balrampur Chini shares declined 0.4%, while Triveni advanced 2% and Praj gained 1.2% on Monday.

Sugar stocks had spiked on Friday after food secretary Sanjeev Chopra said the government will consider an increase in exports in January after assessing the domestic production of sugar.

"If the government allows additional sugar exports, it will be a big boost for the profitability of many of the domestic companies," said Kranthi Bathini, equity strategist at WealthMills Securities. "While domestic price controls will be there, higher exports are good news for the sector."

Bathini expects shares of sugar companies to gain at least 15-20% from the current levels. Like Jani, he is most bullish on the sector leader Balrampur Chinni.

India aims to double ethanol blending with petrol to 20% by 2025 from the current 10%.

"We believe this is a positive development, which is likely to boost government target of ethanol blending to 20% by 2025," said brokerage Prabhudas Lilladher, which recommended a buy rating on Praj. "Thereby, likely to benefit ethanol manufacturers and ethanol plant manufacturers such as Praj Industries." It has set a price target of ₹520 on the stock, implying an upside of almost 39%.

"If you are betting on the sugar price strength, it would be better to have a short-term optimistic outlook on the sector. If your optimism is around ethanol blending, then you could buy these stocks for the long-term," said Jani.

Some analysts warned that export quota relaxations, reduction in GST rates for ethanol production, and early forecasts of production shortfall were only short-term triggers.