Global price rise turns sugar stocks sweeter; shares of producers up 19-30%

Shares of sugar producers have been in focus lately as hopes of a lower-than-anticipated domestic surplus and rising international prices have tickled the sweet tooth of investors.

For the past few years, the sugar industry has faced the twin headwinds of surplus production and higher sugar inventory, leading to pressure on sugar prices. At the start of the sugar season 2020-21 (October 2020-September 2021), India was expected to produce 31 million tonne (MT) of sugar; the opening stock stood at roughly 11 MT on October 1, 2020.

India consumes on average around 25.5- 26 MT of sugar annually. On January 28, 2021, the industry body ISMA released its second adva­nce estimate, which pegged domestic production at 30.2 MT due to reduced output from key sugar-producing states like Uttar Pradesh and Maharashtra — together accounting for more than two-thirds of all-India production. Consequently, domestic sugar availability will reduce for the second consecutive year.

Sugar production in Uttar Pradesh, the country’s largest sugar producing state, in the ongoing season is estimated to decline 20 per cent to approximately 10 MT, as against 12.6 MT in the previous season. The dip in production is primarily due to diversion for production of ethanol, as also increased pest infestation due to rainwater stagnation in sugarcane fields, especially in some eastern and central parts of the state.

Fears of a bumper crop in Maharashtra at the beginning of the year have also receded amid reports of late rainfall impacting the sugarcane crop. “It emerged that cane fields in eastern and southern Solapur suffered the worst damage due to late rains (during October), which forced the authorities to release excess water from the dams, flooding the cane fields,” said analysts at B&K Securities in a recent report. As this water did not recede for 4-6 weeks, in some cases, the crush was only 50-60 per cent of the mill’s original estimates. Overall, the production estimate for Maharashtra now stands at around 10 MT (+/- 0.2 MT) for SY2020-21, which is about 0.5-1.0 MT lower than the original estimate, the report added.

The sharp rally in global sugar prices (up 20 per cent since December) has also added to the Street's optimism. Sugar futures in New York extended its run of gains to the 10th successive month -- the longest since 1961 -- amid supply concerns and prospects of increased ethanol diversion in Brazil due to higher fuel prices. Shipping delays owing to container shortage and lower crop in Thailand and the European Union propelled raw sugar prices to their highest level in nearly four years.

According to ISMA, around 2.5 MT of sugar export have been contracted for this year, so far, with the bulk of the exports to Indonesia. Having said that, Indian exports may run into troubled waters due to container shortages. “The container shortage is limiting our exports,” said Prakash Naiknavare, MD of the National Federation of Cooperative Sugar Factories. “We have signed exports contracts for about 3 MT, but managed to ship only around 1 MT.”

Naiknavare, however, believes the supply-side bottlenecks will resolve gradually and expects India to export 5 MT sugar this season, down 12 per cent over last year’s record 5.7 MT. Any increase in exports will only reduce availability and lift domestic prices, which after bottoming in December have started inching up.

Against this backdrop, shares of sugar mills like Balrampur Chini Mills, Dhampur Sugar, Dwarikesh Sugar, and Triveni Engineering have rallied in the range of 19 to 30 per cent in the last couple of weeks.

“From a mid-to-long term perspective, we like both Dalmia Bharat Sugar and Triveni Engineering as we believe they will be least impacted from the decline in recoveries and yield," said Sanjay Manyal, research analyst, ICICI Securities. 

Manyal also remains positive on Balrampur Chini on the back of its capacity expansion in ethanol. But, the next couple of quarters are likely to be impacted by lower sugar production in eastern UP, he said.