Sugar scrips up on debt recast hopes

Other gainers include Simbhaoli Sugars (25%), Shree Renuka (12.2%) and Bajaj Hindusthan (11.7%)

Sugar stocks surged by up to 35 per cent during the last two trading sessions on hopes of an increase in mills' profitability, following indications of a debt recast by the Ministry of Finance.

The share price of Uttam Sugar jumped by 34.88 per cent to close on Monday at Rs 65.55, that of Simbhaoli Sugars shot up by 25 per cent to Rs 33.75. Companies like Shree Renuka Sugars and Bajaj Hindusthan Sugar also reported 12.21 per cent and 11.70 per cent surge in their stock prices to close on Monday at Rs 14.70 and Rs 14.80 respectively.

The rally in sugar stocks indicates favourable fundamentals. Hovering around Rs 35 a kg, the ex-mill sugar price almost covers up cost of production. This means, mills would be able to generate profits in the next few quarters on elevated sugar price levels. Debt recast would further lower interest outgo for mills, resulting in an increase in their profits.

"Technically, the rally in sugar stocks is a recovery after bottoming out in the last few months. There could be further increases in the coming days," said Nagaraj Shetti, Technical Research Analyst, HDFC Securities Ltd.

Meanwhile, domestic sugar consumption is likely to outpace production for the second successive year in SS2017 (sugar season ending September 2017), given the lower sugar production in the major states of Maharashtra and Karnataka. While this decline will be offset to some extent by increased sugar production from Uttar Pradesh, the overall production is expected to decline by nine per cent and fall short by 2.5-2.8 million tonnes of domestic sugar consumption, which continues to grow at a steady pace of 2-3 per cent a year.

"The expected decline in the sugar production during SS2017, coupled with the decline in the domestic sugar stocks during SS2016 and the impact of the global sugar deficit scenario has firmed up domestic sugar prices to Rs 36,200/MT in October 2016, although there was a dip in November following the demonetisation and the arrival of the new crop. The sugar prices dipped further to Rs 34,500-34,750/MT in the first week of December following subdued demand from traders due to the cash crunch. However, with the demand having recovered owing to the ongoing festive season, the prices have improved slightly to Rs 35,000/MT currently. Sugar prices are expected to remain firm in the near term, given the tight stock position," said Sabyasachi Majumdar, Head (Corporate Ratings), Icra.

Overall, efficient and forward-integrated sugar mills is likely to report healthy profitability trends across most key producing states over the next two to three quarters. However, overhang of past losses, which were largely funded by debt, will continue to weigh on net margins, capitalization and coverage indicators of sugar mills, especially the weaker ones.