Analysts selective on sugar stocks as higher prices keeps outlook upbeat

Sugar 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. 

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.

In comparison, the BSE Sensex has modestly gained 11 per cent during this period.

Analysts expect lower output to keep sugar prices elevated at least for the next year, driving gains for the sector. 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.

“The government’s ethanol blending push will benefit current players. 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. 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.

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.

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.

“The grain-based ethanol would add one more revenue stream for the industry and contribute to the revenue and profitability. 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.

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.

“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.

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. 

Need for caution

India has been exporting surplus sugar for the last five years. 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.

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.

Further, the cyclical commodity-led nature of the sector warrants selective stock picking.

“As the demand and supply situation changes quickly in commodities, investors can get trapped in the peak buying of such stocks. Only invest after closely tracking the changing environment. Pick companies that evolve their strategy as per the market dynamics", said Akhil Bhardwaj, Senior Partner, Alpha Capital.