Sugar stocks were strong outperformers on Tuesday, after falling last week in-line with the broad market weakness. Stocks of sugar producers had gained between 2 and 7 per cent in Tuesday’s trade, with Bannari Amman Sugars being the only exception, closing the day marginally lower than Monday. Triveni Engineering Industries was the best performer among the mid and large-cap sugar mills gaining an impressive 6.6 per cent on Tuesday. Amongst the micro caps KCP Sugar and Industries topped the chart with a whopping 16 per cent gain in trade on Tuesday.

The rally in sugar stocks yesterday was possibly on the back of two reasons.

For one, the Ministry of Consumer Affairs, Food and Public Distribution has announced 100 per cent incentive on sugar sacrificed for producing ethanol from B-heavy molasses, sugarcane juice and syrup. This means that the sugar diverted for ethanol will now be added to the month-end stock figure, which will be considered for calculating the sales allocation for the subsequent month. Sugar, being an essential commodity, Government regulates the sales and distribution of the commodity under the Essential Commodity Act, 1955. The month-end stock figure is considered while arriving at the sales allocation for the subsequent month.

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As a result, the month-end stock will be higher, resulting in higher sales allocation in the next month. For instance, if a company diverted 1,000 tonnes for ethanol and held 9000 tonnes of sugar as inventory, earlier 9,000 tonnes used to be considered for calculating sales allocation, whereas under the new policy 10,000 tonnes will be used for the same. As a result, monthly sales allocation will increase for sugar mills.

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Second, there is an expectation that the Petroleum Ministry may hike the procurement price of broken grain-based ethanol from the current ₹55.54 a litre to ₹58.5 a litre. Companies such as Triveni Engineering that have grain-based ethanol capacity will benefit from this move. However, the unit economics of this will depend on the cost of procuring the broken grains.

The above reasons apart, fundamentals have also been firming up for the commodity. Global sugar prices witnessed an uptrend in December. ISA Daily Price, which is a simple average of the close quotes for the first three future positions of the New York ICE, Contract No. 11, as published on the website of the International Sugar Organisation, has increased from USD 0.1871 per lb (pound) to $0.1966 per lb. This will help Indian companies garner higher realisation on sugar exports.

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Finally, the expectation of higher sugar export allowance by the Government on the back of bumper crop in 2021-22 sugar year and also in the current sugar season, has also had a positive impact on the stock prices of sugar mills.

The current year 2022 has been positive for sugar mills overall, with a few significant developments such as achievement of 10 per cent ethanol blended petrol (EBP) target in FY22, followed by Government’s resolve to increase the EBP target to 20 per cent by 2025. Also, the global sugar prices spiralled in the first half of the year, following Russian-Ukraine crisis, and draught in China and Europe.

Looking ahead, unless we witness a sharp deceleration in global economic growth resulting in a deep correction in crude, supports are likely to remain in place for sugar prices. Also, the EBP implementation and Government support to mills by way of a higher price for ethanol procurement etc. should help the Sugar industry sustain healthy growth over the next 1-2 years. Over the medium term, volatility, and cyclicality in the sugar business due to fluctuations in the global and domestic price realisation should wane off, rendering stability to sugar mills.  

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