Sugar stocks can sweeten portfolio

We had strongly recommended sugar stocks in the same column “Sweeten your long-term portfolio with sugar stocks” on April 7, 2015, and reiterated again on March 3, 2016, in “Buying quality sugar stocks will reap sweet returns”. Since April 2015, the market cap of top five sugar stocks has moved up by over 105% and from March 2016, the same has gone up by 45%.

It is estimated that the sugar factories in the country will be producing anything between 7,00,000 and 8,00,000 tons of the sweetener in October, the first month of the 2017-18 sugar crop year (October to September).  Never in the past, had the industry produced even half this amount in October.

The development comes as a big relief for the government. The availability of around 4 million tons as the season’s opening stocks and the stepped-up supply of new sugar this month are proving sufficient to meet the festival demand.  

The short-term correction in sugar prices might extend to the whole of 2017-18 crop year as it is expected that the country’s total sugar output will grow by 25% to around 25.5 million tons (mt) in the current marketing year on likely higher output in Uttar Pradesh and Maharashtra following good rains. Production in Uttar Pradesh is expected to be higher by 19% at 10.5 mt this year. Maharashtra’s production, which came down to 4.2 mt in 2016-17 from 8.4 mt in 2015-16, is expected to increase to 8.4-8.5 mt this year. Karnataka is also expected to see its production rise by over 80% to 4 mt this year.

However, as against total production of 25.5 million tons, the country’s annual consumption is pegged at a lower level of 24 million tonnes.

The industry has a carryover stock of close to 5 mt as on September 30. This apart, the industry was allowed imports of close to 5-lakh tonnes of sugar this fiscal. All these developments point towards some significant weakness in the domestic sugar prices in the near future.

Now domestic sugar prices are up just about 8% on year-on-year basis – such small increase can be easily more than compensated by a rise in cane prices and other input costs, and also by the weakness expected in the domestic sugar prices going ahead.

Both sugar stocks and sugar prices never had linear consistent growth path in the last two and half decades. Thus, next Diwali may give a bitter taste to pure sugar stocks. Of course, sugar companies, which have huge ethanol capacities or value unlocking from their assets could still sweeten your portfolios.      

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd