Most sugar stocks rise in trade; Shree Renuka Sugars gains over 3%

According to Crisil, sugar offtake in the current sugar season is expected to remain more or less at last season levels despite the Covid-19 pandemic

Shares of most sugar companies were trading in the positive territory on Thursday even as the government raised sugarcane floor price by 3.6 per cent. The Union Cabinet on Wednesday approved raising the price that sugar mills should pay for sugarcane in the next season beginning October 1, to Rs 285 per 100 kg, up from Rs 275 a year earlier. READ ABOUT IT HERE  

"The increase in sugarcane floor price is definitely negative for the sugar companies as they have to pay more to procure sugar from the farmers. However, the market was anticipating a much bigger hike than 3.6 per cent, which in turn, may have helped the stocks of these companies," explained a commodity analyst with a domestic brokerage firm.  

Among individual names, Magadh Sugar was up over 1 per cent at Rs 126 while Dhampur Sugar was quoting at Rs 141.90, up over 0.5 per cent. Shree Renuka Sugars was trading nearly 3 per cent higher. Other stocks that were trading with decent gains included Avadh Sugar, Dwarikesh Sugar, Bajaj Hindusthan, and Dalmia Bharat - up 1 per cent each. 

According to Crisil, sugar offtake in the current sugar season (SS 2020; October 2019-September 2020) is expected to remain around te same levels seen during the last season levels despite the Covid-19 pandemic. The optimism is due to buoyant exports. The rating firm expects over 30 per cent spurt in sugar exports to nearly 5 million tonne in SS 2020 due to lower production in Thailand. Other key countries which import sugar from India include Kenya, Bangladesh, Afghanistan, and Iran. 

That apart, analysts with Elara Capital note that the five-year ethanol contract from the oil marketing companies (OMCs) will be a big positive. "In our view, this is a major positive for the sugar industry as it provides them with long-term demand visibility. Until last year, OMC issued tenders valid only for one year," the brokerage said. Through this tender, OMCs have invited indigenous manufacturers to bid to supply from December 2020 until November 2025.

"We believe the industry will produce adequate sugar to meet domestic demand while excess cane will move toward producing ethanol. Higher contribution from ethanol would drive profitability while firm sugar prices would further aid earnings. We retain our positive stance on the sector," wrote Pratik Tholiya, an analyst at the brokerage firm.

Among the lot, Elara is bullish on Balrampur Chini given its new 160-kilo litre per day (KLPD) distillery commissioned in January, 2020,  free cash generation of Rs 13.5 billion over FY21-22E and expected new downstream capital expenditure (capex).