Why Sugar Stocks are Rising

The benchmark indices Nifty 50 and BSE Sensex opened with a noticeable gap down on Wednesday. But sugar stocks delivered strong breakouts.

In fact, the entire sugar sector was buzzing, with frontline stocks locked in upper circuits.

Sugar Stocks Performance on Wednesday

Company	Change (%)
Mawana Sugars	12.7
Rajshree Sugars and Chemicals	9.3
Dharampur Sugar mills	7.9
KCP Sugar and Industries	7.2
Balrampur Chini Mills	6.2
Rana Sugars	6.1

Data source: Equitymaster

Among sugar stocks, shares of Mawana Sugars gained the most, rallying 12.7%. Other sugar stocks rose between 5-9% intraday.

The robust rally came on the back of government reports on sugar exports. This came as a sudden surprise to investors, as sugar stocks have been on a falling trajectory since mid-October 2022 due to the cap on sugar exports.

Let's find out what sparked this sudden rally in sugar stocks.

#1 Higher export limit

The rally in the stock came amid expectations of additional export of 1 million (m) tonnes of sugar.

However, this will be possible only if the domestic output meets the government's expectations of 33.6 m tonnes of sugar production.

As of this month, sugar production has reached 24.7 m tonne. The mills have already dispatched 4.3 m tonne of sugar exports out of the 6 m tonne allotted.

This export quota is still lower than the export quota of 7.2 m tonnes and 11.2 m in 2020-21 and 2021-22, respectively.

This additional sugar export quota will be decided after evaluating overall production and the prevailing demand scenario.

Furthermore, a GST reduction from 18% to 5%, coupled with any additional export quota announcement by the government, could support the sugar mills' performance.

The crushing operations will stop by the end of March, and the government will take a call on additional sugar exports by next month.

#2 Boost in ethanol demand

The government plans to create a carry-over stock of ethanol for the next year, anticipating a rise in demand for E20 fuel in the country.

E20 fuel is a blend of 20% ethanol with petrol. The government aims to achieve the 20% ethanol blending target by 2025.

The government has kept the 12% ethanol blending target for 2022-23 ethanol year, while 15% for the next year.

For the current year, about 5 m tonnes of sugar is estimated to be diverted for ethanol production, higher than 3.6 m tonnes in 2021-22.

To meet 15% blending target for next year additional 1.5 billion (bn) litres of ethanol would be required.

The ethanol production capacity has risen to 10.4 bn so far.

What next for sugar stocks?

To enhance the production capacity, the government has approved 243 projects, and banks have already sanctioned Rs 203.3 bn in loans, out of which Rs 110.9 bn has been disbursed.

Last week, the government reviewed the upcoming ethanol projects and is planning to roll out 2.5-3 bn litres of ethanol capacity in the next 9-10 months.

The government has advanced the target for 20% ethanol blending in petrol (also called E20 fuel) to 2025 from 2030.

The sugar business has dramatically benefited since it can now employ the excess ethanol produced underneath the EBP (Ethanol Blended Petrol) program and profit from more significant margins.

Apart from this, rising consumption in the confectionery sector is estimated to grow at a CAGR of 6.4% by 2025, driving the sugar industry's development, as sugar makes up around 25% of the segment's raw materials.

Investment takeaway

While's the long-term outlook of the industry seems positive, one must view sugar stocks with caution.

It is because sugar stocks are considered to be cyclical in nature.

The fortunes of the sugar stocks ebb and flow with sugar prices, which in turn depend on sugar production and supply.

Even with demand being stable, fluctuations in production/supply cause prices to rise and fall. Particularly, crop failures in the world's largest producer Brazil, trigger sharp price rises and vice versa.

Further, their profitability remains vulnerable to government policies and domestic and international trade.

History tells us that sugar stocks give good trading opportunities. There can be occasional spurts in prices giving investors handsome returns in the short run.

If you plan to invest, assess the fundamentals and prospects of the business. Sustained research must not be compromised despite the positive odds.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...