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Published: Apr 30, 2023
Updated: Apr 30, 2023

Sugar Tale

Output Down, Stocks Soar

A mix of seeming contrasting developments augurs well for a hitherto down-in-the-dumps domestic sugar industry. Rising incomes and the accompanying yen for ‘all things sweet’, juxtaposed with the relative shortage of output as a result of the government-directed diversion of more sugarcane towards ethanol rather than sugar production, are making sugar stocks attractive once again in the eyes of discerning investors.

As proof, well-known sugar scrips EID Parry, Balrampur Chini, Dalmia Bharat Sugar and Ugar Sugar have started rising dramatically. The ‘sugar hunt’ is not restricted to India. Brazil is seeing record prices for ethanol as consumers go on a travel spree post-Covid, increasing consumption of the biofuel. Furthermore, cane supplies are already tight due to a severe drought that’s been ravaging yields in the South American nation.

Thus, the current sugar situation in the country, ‘abetted’ by a parallel situation abroad, will benefit almost all Indian sugar companies. So that discerning investors are not spoilt for choice, Corporate India has put together a list of 5 sugar companies worth investing in.

Sugar company shares, which were passing through a dull and drab period on the Indian stock exchanges, have started spiralling upwards. With a sudden rise in demand, these stocks have started moving up the price ladder. EID Parry, for example, which was listless around Rs 433, has moved up to Rs 513, Balrampur Chini has edged up from Rs 306 to Rs 418, Dalmia Bharat Sugar is now quoted around Rs 366 as compared to Rs 282 earlier, and Ugar Sugar has more than doubled from Rs 43 to Rs 107. Piccadilly Agro, which had no buyers around Rs 29, is now quoted around Rs 46 and Shree Renuka Sugars has risen from Rs 38 to Rs 48. Bajaj Hindustan Sugar, which was friendless around Rs 8, is now quoted around Rs 14.50 and Dwarikesh Sugar has edged up from Rs 80 to Rs 92.

In short, the Rs 85,000-crore sugar industry, which had turned gloomy over restrictions followed by a ban on sugar exports, is showing distinct signs of cheerfulness and market observers are hoping for a re-rating of sugar stocks. In fact, market experts have turned bullish over the Indian sugar industry, which is the second largest in the world after Brazil and the number one consumer globally.

This sentiment is buoyed by three developments: (a) Demand for the sweetening agent is on the rise on account of growing urbanization, better incomes and rising aspirations as well as standard of living; (b) Increasing blending of petrol with ethanol – a molasses by-product; i.e., diversion of sugarcane for the manufacture of ethanol instead of sugar, and (c) Widespread fears of lower production of sugar this sugar season ending September 2023. These three factors have led to a distinct change in the sugar industry scenario in the country.

The sugar industry in India is one of the oldest industries and the second largest agro-based one in the country, supporting around 50 million farmers and providing employment to over 6 lakh individuals working in around 735 sugar mills – which have a combined cane-crushing capacity to produce around 40 million tonnes per annum (MTPA). Moreover, the industry also supports hundreds of thousands of other individuals through indirect employment. Again, sugar is a commodity which is meant for consumption. And it goes without saying that there are bright prospects for export of the commodity.

GOVT SHACKLES

Inspite of being so important, the sugar industry in India has failed miserably to make rapid strides. The growth of the industry has been stunted on account of strict government controls – over almost every aspect of the business – starting from prices of the major raw material (sugarcane) to supply of a certain quantity of sugar at a highly concessional price to the government for the public distribution system and how much quantity each mill can sell in the open market. While many industries have made rapid strides after the liberalization of the economy, the sugar industry has been shackled, stunting its operational efficiency and the aspirations of its entrepreneurs. Little wonder then that sugar stocks are not attractive investments like information technology, FMCG, cement, metal and steel stocks.

A leading sugar mill owner laments, “The Indian sugar industry has never stood on its feet even after 75 years of Independence. The government’s debilitating controls and populist policies, coloured by political considerations – often devoid of economic sense – have ensured that it could not even attempt to rise on its own. Mindless and illogical sugar pricing policies have triggered a cycle which ensured that the country oscillated between massive surpluses and severe shortages. The government grappled with large cane arrears while the industry survived on periodic government funded bail-outs and subsidies. Ergo, no sane investor chose to put his/her money on this sector.”

Coming back to the factors behind the rise in sugar scrips, during the current sugar season India is set to produce less sugar than estimated earlier, what with the cane crop maturing early and losing weight due to weather conditions in key cane-growing regions, particularly in Maharashtra and Karnataka. Falling sugarcane yields in the top producing regions of Maharashtra and Karnataka due to early maturity of the crop have prompted various trade houses to scale down sugar production estimates.

OUTPUT DROP

Various estimates suggest that as compared to the actual production of 35.8 million tonnes of sugar last season, the sugar output in the current season ending March 2023 will not exceed, at the most, 34.3 million tonnes. Some experts are even more pessimistic and place the production estimates at 33-33.5 million tonnes. One industry expert opines, "I would not be surprised if the actual production goes below the 33 million tonne level." One leading global trade house has further reduced the output estimate to 32.4 million tonnes, factoring in a big drop in Maharashtra's production to around 113 lakh tonnes as against 137 lakh tonnes produced in the earlier year.

According to Shekhar Gaikwad, Sugar Commissioner of Maharashtra, "Sugar production in the state will come down on account of adverse climatic conditions in different parts of the state. Continuous rains in most of the second half of calendar 2022 rendered the ground wet for long periods, which impacted sugar cane cultivation. As a result, the crushing season would be over early as compared to the last year."

Among other sugar-producing states, while Uttar Pradesh has more or less maintained sugarcane production at around 101 lakh tonnes against 102 lakh tonnes in the previous year, Maharashtra's neighbouring state Karnataka has witnessed a sharp fall of over 4 per cent - from 60 lakh tonnes to 56 lakh tonnes.

After surveying the crop situation in sugar-producing regions in India, a spokesman for Alviean, the world's largest sugar trader, commented, "Widespread early flowering, a sign of crop stress, was induced by reduced solar radiation during the cane development period due to abnormal cloudy conditions during the last half of the monsoon season."

MILLS SHUT

The outcome has been obvious. Sugar mills in Maharashtra and neighbouring Karnataka started to face a cane shortage and at least 17 mills in the country have had no other go but to close down operations early while another two dozen mills were on the verge of closure.

Of course, the continuous downward revision in the output estimate forced the government to restrict sugar exports but by then almost 61 lakh tonnes of sugar were already exported to countries like Indonesia, Bangladesh, Malaysia, Sudan, Somalia and the United Arab Emirates. Even though the export figure was much less compared to 110 lakh tonnes exported in the previous year, it still proved to be too much viewed in the context of the sharp fall in sugar production.

While the sugarcane crop yield was lower, the demand for cane for production of ethanol continued unabated as the government was keen to encourage ethanol production for blending with petrol, the prices of which skyrocketed globally after the breakout of the Ukraine-Russia conflict. Over 45 lakh tonnes of sugarcane juice was diverted towards ethanol manufacturing as compared to 32 lakh tonnes in the previous year. Even sugarcane juice, syrup and molasses are being diverted to production of ethanol.

Now, the government's highly ambitious target of raising ethanol blending in petrol from a mere 5% to 20%, that too ahead of its original schedule, and the price comfort being provided to mills in domestic territory supported with gradual sustainable exports at reasonably good price realizations, has undoubtedly brightened the prospects for the industry. Beginning in December 2022, the government has raised the price of ethanol extracted from sugarcane juice to Rs 65.60 per litre from Rs 63.45 earlier.

Commenting on the mills' performance, Sanjay Chopra, the Union Food Secretary maintains, "The mills are earning good revenue from different streams, including sweetener and ethanol." He has expressed the confidence that 20% ethanol blending with petrol would be met by sourcing ethanol from different feedstock, including sugarcane and grain.

BRAZIL SCENARIO

The global sugar supply crunch is about to get worse amid a food-versus-fuel debate playing out in top exporter Brazil. The South American nation is seeing record prices for ethanol as consumers there take advantage of eased Covid19 restrictions and travel again, increasing consumption of the biofuel. That means mills could start processing more sugarcane into ethanol, rather than into sweetener.

The biofuel is "potentially more profitable, especially for those mills that are tight financially," says Michael McDougall, Managing Director at Paragon Global Markets.

Prices for ethanol at mills in Sao Paulo jumped 10% last week to the highest in data going back to 2000.

Cane supplies are already tight due to a severe drought that's been ravaging yields in Brazil. Cane-crushing dropped 31% in the first half of April compared to a year ago, according to industry group Unica.

All of this is helping sugar to extend its scorching rally. Futures prices in New York are up 73% in the past 12 months. The staple's rise means increasing costs for foodmakers at a time when food inflation and hunger are an increasing concern around the globe.

Brazil can't simply import ethanol to ease supplies, because prices are up in other exporting nations like the US, which is also seeing increased driving and travel as vaccinations progress. In fact, prices are so high for US corn-based ethanol - which nearly doubled in the past 12 months -- that Brazilian biofuel may start to look attractive.

For now, sugar is still more profitable than ethanol in Brazil when it comes to exports. Producer BP-Bunge Bionergia says the sweetener will see a premium of as much as 3 cents per pound through October before narrowing to 1 cent, according to Ricardo Carvalho, commercial director at the joint venture.

Ethanol is also getting relatively more expensive than gasoline in Brazil, which means demand may taper. Brazilian drivers use both fuels, and usually pick whichever is cheaper.

Another factor that could dampen the looming sugar shortage: Most of Brazil's current crop is already sold in advance in export markets. Before converting more cane into ethanol, mills would have to pay an expensive fee to cancel those contracts, according to Bruno Lima, head of sugar at StoneX Group Inc in Brazil. The cost could be more than 4 cents a pound, requiring Brazilian ethanol prices to rise to 21.8 cents a pound versus current levels of around 17 cents, says Lima.

PRICING ISSUE

Global sugar prices are ruling at elevated levels between Rs 33,000 and Rs 40,000 a tonne in the near term. Moreover, prices are likely to continue to rule firm due to a couple of reasons. Despite higher production in Brazil and Thailand, there is a bit of concern over lower production of sugar in the European Union and India. There is also an apprehension that the Indian government might not allow additional exports apart from the six million tonnes permitted.

London-based global diversified financial services firm Marex has said that sugar stocks are low, and supplies from the new crops might continue to disappoint. "We are in an era of extreme weather . Consumption may have grown a bit more than we anticipated. We need to keep prices high enough to persuade producers and consumers to continue to try and squeeze production higher and consumption lower."

Fitch Solutions, another leading global consultancy firm, opines that the more significant development in the global sugar market was the recent downgrade in India's shipment (exports) outlook by ISMA to 6 lakh tonnes. Adding to that, Marex says the lower end of the sugar price is defined by ethanol parity plus a premium, which will depend on prices from April onwards. Fitch Solutions has concluded that India's ethanol policy to increase the blending of petrol will encourage diversion and that would set a floor price for the global sugar market.

SUMMER DEMAND

According to Ashok Jain, President, Bombay Sugar Merchants Association, sugar prices have been climbing up on account of the downward revision of sugar production from the earlier forecast of 13.7 million tonnes to 10.5 million tonnes, buoyancy in overseas sugar markets, the export quota for the whole year earmarked at 61 lakh tonnes being already shipped from India, and rising incomes and improving standards of living. The bullish sentiment in sugar prices has been fanned further on account of rising demand from bulk buyers on account of the summer season. Open market sugar prices have already spurted by over 10 per cent, viewed in the context of a continuous downward revision of production estimates.

The strong price trend in sugar will give a big boost to profit margins and the bottomline of sugar companies. Needless to say, sugar companies have started doing very well and their balance sheets for fiscal 2022-23 and 2023-24 will bring a lot of cheer to their shareholders.

Of course, almost all sugar companies will benefit from the sugar situation in the country but we think the following five companies will be worth investing in for discerning investors. Here goes the list: