Sugar stocks hit the sweet spot after govt okays Rs 3,500 cr export subsidy

Export subsidy announcement a positive but high valuation could restrict gains

The past 12 months have been good for investors in sugar stocks, as the sector has done better than the broader market. The combined market capitalisation (m-cap) of the top 15 sugar manufacturers such as EID Parry, Balrampur Chini, Dhampur Sugar, Shree Renuka Sugar, Bajaj Hindusthan Sugar, Triveni Engineering, and Dalmia Bharat Sugar among others has risen by 22.6 per cent year-on-year (YoY) since last December, against a 13 per cent rally in the benchmark BSE Sensex.
 

Sugar stocks have also outperformed the benchmark since the pandemic spread. The combined m-cap of the firms has more than doubled (up 115 per cent) since the end of March against a 58 per cent rise in the Sensex. It is worth noting, however, that sugar stocks fell more than the broader market in February-March. (See chart)

 

The industry’s performance has been underpinned by a steady improvement in the financial performance of sugar companies. The combined net sales of sugar makers were up 17.6 per cent during the trailing four quarters ending September — growing at the fastest pace in three years. Similarly, the industry’s core operating profit was up 43 per cent YoY during the September quarter (on trailing 12 months’ basis) though net profit was down due to sharp fall in the other income.
 

Sugar makers have benefitted from a steady decline in their raw material and fixed costs, especially the interest burden. While the industry’s net sales are up by about 30 per cent in the past two years, their raw material costs have been flat. However, interest cost on borrowings have fallen 14 per cent.
 

The net result is an expansion in the industry’s gross and net margins as revenues grew faster than cost of production.
 

The Centre’s announcement on Wednesday of an export subsidy of Rs 3,500 crore for the industry will help it sustain the performance. The subsidy will help in export of six million tonnes (mt) of sugar and eliminate the domestic glut. Sugar consumption has lagged in recent years because of factors like poor economic growth and concerns over health.
 

However, this year’s subsidy amount is lower than last year, because the Centre had announced assistance of Rs 6200 crore for exports of up to six million tonnes of sugar.
 

“While this announcement removes uncertainty, the subsidy quantum is modest and delicately balanced. Moreover, the announcement validates risk of government policies that can impact sentiments for the sugar industry,” Achal Lohade and Koundinya Nimmagadda of JM Financial Research said.
 

The Street is also awaiting the likely increase in the Minimum Selling Price (MSP) of sugar, which is currently Rs 31 per kg and is expected to rise to Rs 33 a kg. On top of this, the Uttar Pradesh government is yet to announce the State Advised Price (SAP) of sugarcane, which has a bearing on industry raw material cost and gross margins. A steep rise in SAP could hit industry margins. After the recent rally, sugar stocks look expensive, capping the near-term gains for investors.