Sugar shares rally up to 9% on hopes of strong operational performance

With favourable mix of ethanol towards B-heavy/juice (feedstock) coupled with higher sugar realisations; operating margins are expected at 12.7%-13.7% in FY22-FY23 (slightly higher than FY21 levels).

Shares of sugar companies rallied up to 9 per cent on the BSE in Tuesday’s intra-day trade in an otherwise subdued market. The sweet rally is backed by expectation of strong operational performance, favourable mix of ethanol towards B-heavy/juice (feedstock), and higher sugar realizations.

Shares of Mawana Sugars, Dhampur Sugar Mills, Triveni Engineering & Industries, Balrampur Chini Mills, Dalmia Bharat Sugar and Industries and Dwarikesh Sugar Industries were up between 3 per cent and 9 per cent on the BSE. Most of the sugar stocks traded close to their respective 52-week highs. In comparison, the S&P BSE Sensex was down 0.04 per cent at 57,145 points at 10:01 am.

Earlier this month, the government extended the timeline for disbursement of loan for ethanol projects under different schemes till September 30, 2022 in order to boost domestic production and achieve ethanol blending of 20 per cent by 2025. The move is aimed at facilitating entities to complete their projects and avail benefits of interest subvention.

Credit rating agency ICRA remains optimistic about the industry's inventory levels for the current season due to favourable international sugar realisations. 

"Higher sucrose diversion towards government's ethanol focus as well as policies towards the same would be a sustainable solution to manage sugar inventory levels in medium term. This would thereby support sugar realisations that will expand profit and bolster balance sheet," said Sabyasachi Majumdar, Senior Vice President & Group Head at ICRA.

The revenues of ICRA samples are expected to remain stable over FY2022-FY2023 supported by higher domestic or international sugar prices, improved ethanol realisations, healthy ethanol volumes, partially offset by lower sugar volumes. Meanwhile, operating margin is expected to remain higher than FY2021 at 12.7 per cent-13.7 per cent on favourable mix of ethanol and higher sugar realisations.

The credit rating agency also estimates the capital structure and coverage metrics to emerge stronger. "Higher diversion towards ethanol coupled with healthy export prospects for FY2022 would result in lower inventory levels going forward. As a result, a decline in borrowings of the sample is expected, despite ongoing debt-funded capex plans (for distillery and crushing capacities) for various players," ICRA added.