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Sugar stocks continue to rally; analysts upbeat about earnings

India will likely reap the benefits of a fall in Brazil's sugar production and a rise in global prices.Premium
India will likely reap the benefits of a fall in Brazil's sugar production and a rise in global prices.

  • India had begun the 2020-21 (October-September) sugar season with an opening inventory of 10.6 million tonne. With 29.90 million tonne in projected output as of April, consumption of nearly 26 million tonne and export quota of 6 million tonne, an 8-9 million tonne of surplus is expected

MUMBAI: Sugar stocks have been trending higher, with analysts upbeat about companies' earnings on expectation of a rise in exports from India amid lower output in Brazil and a consequent surge in global prices.

So far this year, shares of Dalmia Bharat Sugar & Industries have surged 100%, while those of Triveni Engineering & Industries have climbed 92%. Balrampur Chini Mills has advanced 77%. Dhampur Sugar Mills, DCM Shriram Industries, Bannari Amman Sugars, and Bajaj Hindustan Sugar have also made significant advances.

According to analysts, initial trends point to a fall in production in Brazil due to less sowing and unfavourable weather conditions.

Other key sugar producers such as Thailand and Europe are also likely to see subdued production which will global supplies under pressure.

Global commodity traders expect at least a 10% drop in sugar output in Brazil to 34-35 million tonnes, as a result of which international sugar prices have risen to cross 16.5 cents per pound.

This augurs well for India’s sugar industry, which has a surplus inventory of 10.5mn tonnes, analysts say.

"We reiterate our positive stance on India’s sugar industry as it is well poised to benefit from global and domestic factors. Lower output from countries like Brazil, Thailand, and the European Union would keep supplies tight and global prices firm, enabling India to increase exports," said Elara Capital in a report to its investors.

So far this year, Indian sugar mills have exported 2.49 million tonnes of the sweetener. An additional 3.03 mn tonnes of sugar is in transit, according to trade body AISTA (All India Sugar Trade Association). Analysts believe that the sugar industry will achieve the 6 million tonne export target set by the government due to attractive international prices.

India had begun the 2020-21 (October-September) sugar season with an opening inventory of 10.6 million tonne. With 29.90 million tonne in projected output as of April, consumption of nearly 26 million tonne and export quota of 6 million tonne, an 8-9 million tonne of surplus is expected.

Surplus sugar can also be diverted for ethanol production. The largest sugar mills in the country have undertaken substantial capacity expansion with respect to ethanol production. Going ahead, this will allow them to better manage sugar supply and avoid glut in the domestic market, according to Choice Broking.

The government's target of 20% ethanol blending with petrol by 2030 has also boosted investor sentiment. India has an ethanol production capacity of 684 crore litre. For the targeted 20% blending, the country will need a 1,000-crore litre capacity.

"The sugar sector was always surrounded by cyclicality in terms of prices and production of sugarcane by farmers but factors like the government’s policy move on ethanol blending target of 20% by 2025 and their efforts to ensure sugarcane farmers are paid without significant arrears seem to be changing the fortunes for the sector. Both the government and industry’s efforts to make business models more sustainable by increasing ethanol blending is mainly what is driving the sugar stocks," said Nirali Shah, Head of Equity Research, Samco Securities.

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