The prospects of sugar company stocks improved following the Government decision to hike import duty on sugar by five per cent to 15 per cent. The move was intended to ring-fence the domestic companies from the sharp fall in international sugar prices.
Most sugar company stocks such as Shree Renuka Sugars, Bajaj Hindusthan, EID-Parry and Dhampur Sugar gained 2-4 per cent on Friday.
International sugar prices have dipped due to a bumper output forecast in Brazil. Sugar traded on the New York-based Inter Continental Exchange had fallen to about 16 cents (about Rs 10) a pound (about 450 grams) recently from a high of 35 cents a pound in February 2011. In last six months, it has fallen 16 per cent.
Despite higher sugarcane output, domestic sugar mills started importing sugar in huge quantity. This had pulled down domestic prices of the sweetener.
The fall in sugar prices has put pressure on companies buying sugarcane from farmers. The arrears to farmers has been rising in the last few months and has reportedly touched Rs 8,000 crore.
Ajit Mishra, Senior Manager, Retail Research, Religare Securities, said the revival in stock prices of sugar companies will be short-lived as the uncertainty shrouding this sector still remains.
“It is advisable for investors to exit these stocks at every bounce back in prices,” he added. While cane prices are regulated by both State and Union governments, sugar prices are left to the market forces.
In May, the Government obliged to the long-standing demand of sugar companies by decontrolling the sector. Sugar mills were allowed to sell sugar in the open market without any restrictions. Earlier, the Government used to specify the quantity of sugar to be sold in open market.
Besides, the obligation on companies to sell sugar at a subsidised rate was also scraped. The sugar procured at lower rate was distributed under public distribution system. The Government has now asked the State governments to buy sugar at market price. The Central Government will compensate the State governments for the difference between the market and PDS price.
Currently, sugar is sold at Rs 13.50 a kg in ration shops. Sugar price at the factory gate has been capped at Rs 32 a kg for two years. The Central Government will pay Rs 18.50 as subsidy to State governments.