Fears over decline in production of sugarcane in view of the monsoon playing truant coupled with sugar demand increasing due to summer and the upcoming festival season may likely lead to the commodity’s prices increasing. The likelihood of improved margins for sugar companies has resulted in a rally in the sugar stocks on Thursday.

Among individual stocks, Uttam Sugar Mills closed at ₹342.05 on Thursday - up 12.37 per cent from the previous close at the BSE. Stocks such as Bajaj Hindusthan, Dalmia Sugars, Balrampur Chini Mills, Dwarikesh Sugar, Shree Renuka Sugars, Avadh Sugars and Mawana Sugars jumped between 2 and 5 per cent.

The stellar run of sugar stocks started in 2021 and still continues. In the case of Uttam Sugar, the stock has moved up a whopping 270 per cent in the past three years. With the rise in temperature, bulk demand for the sweetener increases from ice-cream and soft drinks manufacturers. The Centre’s push towards ethanol blending, too, lends support for the uptick in sugar stocks.

The rally in sugar stocks is likely to continue particularly in view of the centre extending its subsidy programme and fears of lower domestic production and higher domestic demand. Currently, due to the government’s intervention which has imposed a cap on sugar price and support, prices have not rallied. But ethanol prices will be hiked shortly that will benefit ethanol producers, Bhavik Patel, Sr Research Analyst at Tradebulls Securities, told businessline.

Production down

Indian sugar production is projected to increase by 4 million tonnes (mt) to 36 mt in the 2023-24 season (October 2023-September 2024), the US Department of Agriculture has said. But, India is likely to produce 32.8 mt of sugar in the 2022-23 marketing year, down 3.5 per cent from the previous forecast, as sugarcane yields in major producing States fell due to erratic weather conditions, said Indian Sugar Mills Association, an apex trade body, in April.

Since the price rise could add fuel to elevated food inflation, the Centre is unlikely to allow additional sugar exports. Global prices are already trading near multi-year highs.

The stock price increase is primarily being driven by rising domestic demand, a lowering closing stock - anticipated to be 6 mt - and the threat of El Nino affecting agriculture production in Asia, said Aamar Deo Singh, Head Advisory, Angel One Ltd.

Striking gold with ethanol

Going forward, ethanol is set to become the money spinner for most of the sugar mills. Ethanol is a biofuel produced naturally through the fermentation of sugars by yeast. It is used in the production of drugs, plastics, polishes and cosmetics and also as an alternative fuel source. It is the latter that is going to bring a windfall for the sugar makers.

S Ranganathan, Head of Research at LKP Securities, told businessline that the biggest tailwind for the large integrated sugar mills is that they have huge capacity to “supply ethanol to the three oil marketing companies at very profitable prices. These integrated sugar mills have de-risked their business model and today, the profotability from the ethanil business – which constitutes 25-30 per cent of revenues – is much higher than the sugar business.”

Additionally, the government will likely come out with a policy on flex-fuel cars. Although widespread use of such vehicles will take longer, a moderate adoption is enough to drive up ethanol consumption even after 2025.

Bullish outlook

Though the outlook is bullish for sugar sector and companies, investors should remain cautious considering the cyclical nature of the crop. Ranganathan said most of the integrated sugar mills have good balance-sheet to hold on to a large inventory of sugar for a long time, which they can liquidate when prices increase. Besides, the effect of El Nino is a key factor to be considered.