Sugar stocks: In a sweet spot

Shares of Dwarikesh Sugar Industries, Ponni Sugars (Erode), Dharani Sugars & Chemicals, Sir Shadi Lal Enterprises, Gayatri Sugars, Shree Renuka Sugars, Indian Sucrose, Triveni Engineering & Industries, and Avadh Sugar have gained between 3-7% in last few days following the firm trend in sugar and molasses prices.

Global and domestic prices have gained upward momentum helped lower inventory levels and rising global deficit.

According to the International Sugar Organization forecast, the world sugar deficit is pegged at 61.2 Lakh tonnes as compared to the earlier forecast of 47.6 Lakh tonnes.

This change has been driven by lower output from major producing countries, such as India, Thailand, the EU, and Central-South Brazil. The higher estimated deficit also has led to global sugar prices increasing to US cents 13.3 per pound in December 2019, up 5% on the month.

Domestically, the sugar production is expected to fall due to a lower cane crushing.
Leading states, such as Maharashtra (down by 75%) and Karnataka (down 24%) witnessed a sharp decline in sugar production while Uttar Pradesh registered a growth of 12%.

Indian Sugar Mills Association (ISMA) in its latest press release says all- India sugar production is down 35% on year at 45.8 Lakh tonnes as of 15 December.

Favorable government policies have aided in keeping sugar supply under check, and, consequently, prices have sustained above MSP of Rs 31 per kg.

Meanwhile, prices of by-product – molasses too have strengthened following the government’s decision to allow higher prices for Ethanol.

Molasses prices have rallied from Rs 550 per 100 kg last week to Rs 690 per 100 kg on Friday in Punjab.

The firm trend in Molasses prices will continue following the two tenders floated by OMC in this season (ethanol supply year December 2019-November 2020). Sugar mills and standalone distilleries have offered to supply 163 crore liters of ethanol.

Of this, the supply of ethanol from sugarcane juice and ‘B’ heavy molasses of about 73 crore liters – almost double that of last year (CY18-19).

It is expected that the lower cane production, higher diversion to ethanol and a pickup in exports should lead to lower inventory levels in India by the end of the season.

The trend augurs well for Sugar Mill operators.

More importantly, we believe investors should keep a close watch on companies having large ethanol capacities which we understand will make significant margins then pure standalone sugar players

We believe that Dhampur and Balrampur Chini look very well positioned in the ethanol space and are likely to report a strong set of financials ahead in the H2 of FY20 and for FY21 also.

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