Sugar stocks shine amidst multiple positive triggers

In the last few weeks, several sugar stocks have been rallying even in the midst of market mayhem. Some of the stocks that have rallied sharply amidst this market correction are stocks like Dwarikesh Sugar, Mawana Sugar, Dhampur Sugar, Triveni Engineering etc. In most cases, the rally has ranged between 2% to 8%. In fact, some of the stocks have been on a consistent rally, as for example, the UP based Dwarikesh Sugar. 

What is driving sugar stocks. Firstly, there is the demand supply equation that is favouring sugar prices. The sugar year typically extends from October to September next year, also called the crushing year. India has already been exporting record amounts of sugar and the coming sugar year is likely to be still better. With global demand well in excess of supply, the prices of sugar have remained robust for better part of the last few years.

The second big trigger is the expected recovery in demand for sugar. Apart from export demand, which has been very strong, domestic demand for sugar largely comes from the institutional segment. This includes the dairies, confectioners and FMCG companies buying sugar in bulk. With economic activity now back to normal and most hotels and restaurants back to peak operation, the institutional demand for sugar is likely to be robust in India.

Apart from robust sugar demand and solid sugar recoveries, sugar companies are also gaining from the ethanol push. The government has pulled back the 20% ethanol blending target to 2025. Despite that, the estimated sugar production for 2021-22 season was over 31 million tons after 3.4 million tons of sugar was diverted to ethanol. Most distilleries are expected to go on stream in FY23 so ethanol profits get another big push.

ICICI Securities in a recent report on the sugar sector has underlined that the sugar prices would could move up to Rs.36-37/kg by April 2022. In addition, with more distillery volumes going on stream, the increase in distillery volume and higher sugar prices would result in significant jump in operating margins for the sugar companies. The companies that have bene rallying in the last few weeks are the big beneficiaries of these trends.

In a tough market, sugar has become a defensive play. With crude at $130/bbl, the ethanol blending almost becomes an urgent call for the sugar companies to reduce the dollar outflow of the government in the form of 85% dependence on imported crude. That is, by itself, going to be highly value accretive for Indian sugar stocks.