Dharani Sugars to Shree Renuka, sugar stocks fly high on ethanol norms

The last 12 months have been extra sweet for investors in sugar companies. The country’s top sugar producers have been some of the best performing stocks in the mid- and small-cap space and have bettered large-cap stocks by a large margin.

The combined market capitalisation of the 19 listed integrated sugar companies has risen a whopping 129 per cent since the end of January 2020, compared with a 30 per cent rise in the benchmark BSE Sensex during the period.

The sugar companies in Business Standard’s sample had a combined market capitalisation of Rs 44,605 crore on Wednesday, up from Rs 19,500 crore at the end of January 2020.

Among the major sugar companies, stocks of Dharani Sugars have jumped 305 per cent, Shree Renuka Sugars 239 per cent, and Triveni Engineering Industries 238 per cent.

Meanwhile, EID Parry has risen 42 per cent, Sakthi Sugars 81 per cent, and Dhampur Sugar 107 per cent, but these stocks have trailed others in the industry.

Many analysts see even more upside for sugar investors citing a positive outlook for the industry. “The rally in sugar stocks is tied to the latest move by government to the increase ethanol blending in petrol to 20 per cent over the next five years. This will provide a new source of revenue stream for sugar companies that could be match their current revenues from manufacturing and selling sugar,” says Shailendra Kumar, chief investment officer of Narnolia Securities. This will turn the industry into a structural growth story from cyclical now. “We maintain our positive view on sugar sector given favourable policy framework for over next 2-3 years (till adequate distillery capacities get set up) and most efficient companies will enjoy significant profitability/cash flows in the meantime,” write Achal Lohade and Shrenik Bachhawat of JJ Financial.

The brokerage has maintained its ‘buy’ call on Balrampur Chini and EID Parry despite the recent rally in their share prices.

At present, 8.5 per cent of ethanol is blended with petrol in the country. So, the new blending policy can potentially double the sugar companies’ revenues from this.

The ethanol or the distillery business accounted for around 10 per cent of the industry’s revenues, but it is far more profitable than their traditional sugar business. The analysts hope that with the new norms, ethanol could become the prime earnings driver for many of these companies. Moreover, earnings from ethanol business are also expected to be far less cyclical than the sugarbusiness. However, such a big scale-up in ethanol production may force many sugar companies to reduce sugar output.

Other analysts, however, caution investors over the already rich valuations. “The stock price of most sugar firms is now running ahead of fundamentals with record high valuation, even though earnings growth has been disappointing in recent quarters," says G Chokkalingam, founder and managing director of Equinomics Research & Advisory Services.

The listed sugar companies’ combined net sales declined 3.1 per cent year-on-year (YoY) during the trailing 12-months in Q2FY22, while net profit rose 15.6 per cent YoY on a low base.

According to Chokkalingam the earnings upside from auto ethanol is still 2-3 years away and things can change in the industry or broader market during that period.