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<\/p>\nSugar prices are hovering near six-year highs, leaving a bad taste in Indian consumers’ palates but sweetening the portfolios of investors in related stocks at Dalal Street.<\/p>\n
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Shares of sugar manufacturers such as Piccadily Agro, DCM Shriram, Magadh Sugar, and Bajaj Hindustan have rallied up to a whopping 200 per cent so far in the financial year 2024 (FY24) as deficient monsoon rains in major sugarcane producer states like Maharashtra and Karnataka are expected to lead to a shortfall in sugar output ahead.<\/p>\n
In comparison, the BSE Sensex has modestly gained 11 per cent during this period.<\/p>\n
Analysts expect lower output to keep sugar prices elevated at least for the next year, driving gains for the sector.<\/p>\n
The industry’s growing diversion towards high-margin ethanol production remains another key positive, hence, investors should selectively add stocks in this space, they suggest.<\/p>\n
“The government’s ethanol blending push will benefit current players.<\/p>\n
“The formation of the global biofuel alliance recently at the G20 is also towards this end. Further, the festive season has already begun, leading to increased sugar consumption and demand.<\/p>\n
“We like Balrampur Chini, Dwarikesh Sugar, EID Parry and Praj Industries and see 10-15 per cent upside in these stocks,” said T Manish, Research Analyst, Samco Securities.<\/p>\n
The government aims to achieve a 20 per cent ethanol blending target (with petrol) by 2025 (11.5 per cent at present), which is expected to lead to more capacity addition in the next few years.<\/p>\n
The 20 per cent target would require 11 billion litres (bn ltr) of ethanol. DAM Capital believes diversion from sugarcane juice and B-heavy ethanol would suffice for 7-8 bn ltr and the remaining 3-4 bn ltr of ethanol would be produced through grains.<\/p>\n
“The grain-based ethanol would add one more revenue stream for the industry and contribute to the revenue and profitability.<\/p>\n
“Many sugar companies have set up grain-based distilleries to tap the opportunity arising out of the increase in ethanol blending levels,” it said in a recent report.<\/p>\n
The brokerage has initiated coverage on the sector with ‘buy’ ratings on UP-based companies–Balrampur Chini, Triveni Engineering, Dalmia Bharat, Dwarikesh Sugar– amid attractive valuations.<\/p>\n
“With sustainable sugar production in UP, higher sugar prices and increasing utilisation of new distillery capacity, UP-based sugar companies are expected to witness strong earnings growth for the next two years,” it said.<\/p>\n
Moreover, with the expected drop in sugar production caused by El Nino, domestic sugar prices would continue to remain firm above Rs 37 a kg for the next year, it notes.<\/p>\n
Need for caution<\/strong><\/p>\n India has been exporting surplus sugar for the last five years.<\/p>\n However, after curbs in the previous season, reports say that the government could ban sugar exports this season as well to curb the surge in domestic prices.<\/p>\n In rupee terms, global raw and refined sugar prices are currently higher at Rs 47 a kg and Rs 59 a kg compared to the current domestic prices of Rs 38 a kg, as per DAM Capital.<\/p>\n Further, the cyclical commodity-led nature of the sector warrants selective stock picking.<\/p>\n “As the demand and supply situation changes quickly in commodities, investors can get trapped in the peak buying of such stocks.<\/p>\n “Only invest after closely tracking the changing environment.<\/p>\n “Pick companies that evolve their strategy as per the market dynamics”, said Akhil Bhardwaj, senior partner, Alpha Capital.<\/p>\n