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Export news sweetens sugar stocks a little

Export news sweetens sugar stocks a little
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First Published: Wed, Mar 23 2011. 10 46 PM IST
Updated: Wed, Mar 23 2011. 10 46 PM IST
The sugar industry can export 500,000 tonnes of the sweetener, with the government finally approving the transaction. A group of ministers took the final call on Tuesday, though the decision had been in the works for months now. Sugar stocks perked up a bit on Wednesday, with Bajaj Hindusthan Ltd’s share price rising by about 2%, Shree Renuka Sugars Ltd by about 1.5% and Balrampur Chini Mills Ltd by a little under 1%.
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Investor caution is understandable. The quantum of exports allowed is too small to have any significant impact. The domestic market is still facing subdued sugar prices. Also, since this development was expected, it had already been factored in by investors. The delay should be seen as a sign of the government’s reluctance to see sugar leave Indian shores. That may appear surprising, since the current season’s sugar output of about 25 million tonnes is nearly 20% higher over the previous season’s. But the government will not take chances, not after the spiral in sugar prices in the previous season. It does not want to take a liberal approach to exports, only to be faced with lower-than-expected domestic stocks. That will be the signal for domestic prices to shoot through the roof. Food inflation has moderated in recent weeks, and a spike in sugar prices will be unwelcome.
Investors in sugar stocks should be cautious about getting excited by this development. Last year, they were hurt by the sharp volatility in sugar prices. More recently, a sharp jump in international sugar prices created similar expectations for local sugar, which did not materialize. International prices of sugar have risen by about 40% from a year ago, while domestic prices have fallen by 10% over the same period. However, domestic prices have recovered by about 12% from the low levels in June. In the near term, sugar margins are unlikely to improve sharply. But the March quarter will see a lower impact of high-cost carry-over stocks from the previous season. A higher contribution from by-products should add to profits, too. Investors already know these factors. If the government allows more sugar exports, investors could allow themselves the luxury of a little more optimism on the sector’s prospects.
Graphic by Yogesh Kumar/Mint
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First Published: Wed, Mar 23 2011. 10 46 PM IST