Sugar stocks hit 52-week high

Less domestic output , with a widening global deficit, resulting in more realisation and profits, among favourable factors

Most sugar companies’ share prices hit a new 52-week high on Monday, after a sharp rise in the sweetener’s price in global markets. Falling production in India this crushing season has narrowed the estimate of carryover stocks for the next season and analysts expect a rally in sugar prices.

The share of Dharani Sugars jumped by 20 per cent on Monday, to close at Rs 56.30. Uttam Sugar and DCM Shriram rose 10.6 per cent and 7.2 per cent to Rs 60.25 and 159.35, respectively. Other sugar stocks also jumped.

The markets remain favourable, with an expected global deficit of a little over four million tonnes. And, output in India is expected to remain below 25.2 mt, an over 10 per cent decline from last year’s 28.3 mt.

Prices on the benchmark InterContinental Exchange (ICE) jumped 12 per cent in the past two weeks, after global consultancy Societe General said the deficit would widen next year. ICE futures for delivery in the near month was trading at a many months' high at 19.13 cents/lb on Monday.

In the Indian markets, the latest global price spike is yet to percolate but strong fundamentals have supported a level of Rs 3,722 a quintal in the domestic wholesale markets in the past two weeks.

A study by rating agency ICRA expects supply correction during sugar year 2015-16 to benefit domestic manufacturers. It estimates production at 25.2 mt, down 11 per cent over a year before. Lower production and exports of around 1.6 mt are likely to bring down closing stocks to 7.6 mt from 9.5 mt in sugar year 2015. While it is too early to estimate production for the 2017 season, ICRA expect this to fall by 48   per cent, to 23-24 mt.

“We estimate better year-on-year profitability trends ahead for most sugar mills for the next two to three quarters, driven mainly by the improving price trends since August 2015 and stock correction. However, the absolute profit levels and net margins would continue to be weighed down by high amounts of debt dues and/or cane dues, incurred to cover losses in the previous sugar years. Further, the extent of profitability improvement is going to vary substantially, not only from state to state but also across mills within the same state,” said Sabyasachi Majumdar, senior vice-president, ICRA.

The rising trend in sugar prices since August 2015 was driven by a number of factors. Among these were a government notification on mandatory exports in September, followed by announcement of a cane production subsidy in December, market anticipation of supply correction driven by drought conditions in certain key growing regions and the impact of a global deficit scenario. Prices climbed to about Rs 34,000 a tonne by May, an almost 50 per cent high over the July 2015 lows.

Majumdar added, “With renewed focus on the ethanol blending programme and mandatory ethanol blending having been revised from five per cent to 10 per cent, the new fixed pricing mechanism for ethanol supplied to oil marketing companies and removal of central excise duty should augur well for profitability of the industry as a whole.”

Revenues of most mills increased in FY16 from a year before, with higher sugar and byproduct sales.