Sugar stocks post handsome gains on improving price outlook

Scrips of sugar companies, such as Bajaj Hindusthan, Balrampur Chini, Dhampur Sugars and DCM Shriram, were on a roll on Friday.

As the outlook for sugar has turned bullish on lower-than-expected output amid a rise in domestic demand for summer, stocks of sugar companies have surged 8 to 51 per cent in the past one month (see table), outpacing the benchmark Sensex, which has gained 5.4 per cent during the period. The CNX Nifty has moved up 7.6 per cent during the period.

The Government’s move to incentivise raw sugar exports, a drought in Brazil — the world’s largest sugar producer — and a prolonged dry period since the beginning of the year affecting the crop in Thailand and Australia, are also seen to be supporting sugar prices.

The rebound in investor interest in sugar company stocks is notwithstanding the huge pile-up of cane arrears to the tune of ₹15,000 crore in the current season. In Uttar Pradesh, the second largest sugar producing State, pending payment by sugar companies to farmers is estimated at ₹10,500 crore, while in Karnataka the dues are estimated at ₹3,300 crore.

In Muzaffarnagar, a key terminal market for sugar in North India, prices have moved up from ₹2,950 a quintal in early February to ₹3,420 currently, up 16 per cent. Similarly, in Kolhapur, the price for the medium grade has increased to ₹3,304 from ₹2,656 during the period. Interestingly, retail prices, as monitored by the Ministry of Consumer Affairs, saw minor changes in some markets during the period.

The Indian Sugar Mills Association (ISMA) expects output to decline 5 per cent in the current season to September at 23.8 million tonnes from earlier estimates.

“Even though there is a drop in production, inventory levels as on October 1, 2014, will be quite comfortable. With the rupee appreciating against the dollar, we do not know how much exports will take place. We are surprised at the movement in stock prices,” said Ajit Shriram, Chairman, ISMA.

Sugar prices, which had touched a five-year-low in early-February, reversed as the crushing operations head to a close.

“This rally is not restricted to sugar alone, it is across the board. People are buying sugar stocks expecting prices to rise further on shortfall in production, and that would reflect in better performance of companies, going ahead,” said Kishore P Ostwal, CMD of CNI Research.

However, Ostwal said he was sceptical on whether the rally would sustain, as it would depend on the policies of the new Government.

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