What sugarcane FRP price hike means for sugar stocks

The Cabinet on Wednesday cleared the decision to increase the Fair and Remunerative Price (FRP) of sugarcane for the 2021-22 marketing year (October-September) in the meeting of the Cabinet Committee on Economic Affairs (CCEA). The government has hiked the minimum price that mills have to pay to sugarcane farmers by ₹5 to ₹290 per quintal, but ruled out any immediate increase in the selling price of sugar.

Analysts expect that the hike in FRP by ₹5 will not have any adverse impact on sugar stocks because the hike is largely in the expected line. Santosh Meena, Head of Research, Swastika Investmart said that the the market will look for a hike in state advisory price (SAP) in Uttar Pradesh which is not hiked in the last four years but it can be hiked ahead of the election.

“The sugar sector is going through a structural bull run on the back of multiple tailwinds like government support, ethanol blending, and a rise in global sugar prices,” Meena added. He further said that Ethanol story is a major growth driver for the industry where the industry is expecting that there should be a rise in minimum selling price (MSP) for sugar whereas ethanol price should also become more attractive.

The central government announces the FRP, the minimum price that mills have to pay to cane growers, every year before start of the sugarcane crushing season. The price for is set based on recommendation from an expert panel taking into account various factors including interests of sugar mills, farmers and the final consumer.

"The govt's decision to hike this price is marginally positive for farmers and farmworkers. But since the government has refused a rise in the price at which mills can sell is a dampener. From the market perspective, sugar stocks undergo cyclical ups and downs. But they were never consistent compounders or long-term wealth creators," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Santosh Meena's overall view for sugar sector is bullish where he believes this bull run has more legs to go and based on fundamental, Balrampur chini will remain his top pick with near term target of ₹425.