Why sugar stocks are in a sweet spot today

NEW DELHI: Sugar stocks were in high demand on Tuesday with many counters hitting the upper circuit limits after the Indian Sugar Mills Association (ISMA) wrote to Prime Minister’s Office to increase prices.

ISMA wrote to the PMO to immediately increase the minimum sale price (MSP) of sugar from Rs 31 per kg to at least Rs 34-35 per kg to help it clear pending sugarcane dues ahead of the new crushing season that will start from October.

Following the development, Dwarikesh Sugar Industries and Balrampur Chini Mills soared 6 per cent each to Rs 73.95 and Rs 361.90, respectively.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said sugar stocks are cyclicals and they give good returns when the industry does well.

"The decline in production in Brazil augurs well for the fortunes of the industry. It appears that sugar prices are likely to move up, but only marginally," he added.

Also, the raw sugar price has reached a four-year high due to a fall in supply. US sugar futures hit a new record high on the back of lower Brazilian sugarcane output.

"Over the coming decade, Brazil and India are expected to dominate the world’s sugar market as the largest producer of cane sugar. Higher consumption will be triggered by expanding demand for sugar-rich confectionery products and soft drinks," said Likhita Chepa at CapitalVia Global Research, who is bullish on the sector.

Shares of smaller sugar producers - Magadh Sugar & Energy, Dharani Sugars & Chemicals, Uttam Sugar Mills, Rana Sugars, Piccadily Agro Industries, KM Sugar mills and Piccadily Sugar & Allied Industries soared 5 per cent each, their daily circuit limit.

Dalmia Bharat Sugar and Industries, Dhampur Sugar Mills and Triveni Engineering advanced 4 per cent each to Rs 437.80, Rs 319.70 and Rs 185.50, respectively.

Chepa of CapitalVia has picked Balrampur Chini Mills as one of the most efficient players in this space. "With increase in distillery capacities and expected increase in sugar prices its margins are expected to improve in the coming quarters," she added.

However, Vijaykumar of Geojit is not much optimistic about the sector. "From an investment perspective, sugar stocks have never been wealth creators," he cautioned.