Sugar stocks jump up to 19%

Expectation of higher profitability at mills on less output fuels the rally; export levy impact now shrugged off

Sugar stocks rose by up to 19 per cent on Monday, following expectations of better profitability. Dalmia Sugar and Dwarikesh Sugar moved up 19 per cent; Dhampur Sugar and DCM Shriram jumped nearly 17 per cent. Stocks of Shree Renuka Sugars and Bajaj Hindusthan Sugar rose nearly 12 per cent.

Following the 20 per cent export levy, there had been panic selling but traders seem to have realised that had nothing to do with domestic issues.

“The fundamentals remained absolutely unchanged over the past two months, with stable sugar prices. Hence, there is no particular trigger which drove stocks. Sugar prices remained between Rs 33 and Rs 34.50 a kg,” said Abinash Verma, director-general, Indian Sugar Mills Association. Output in Maharashtra, the second largest producing state, is estimated to decline by 50 per cent during the next crushing season of 2016-17 (October–September), due to drought in major producing regions. Trade sources estimate output at 4.5 million tonnes in 2016-17, as against 8.4 mt the previous year.

A recent Rabobank report forecast India’s output at 23 mt in 2016-17, as against a little over 25 mt in 2015-16. “India’s output is estimated to decline, resulting in higher realisation for mills. In world markets, too, prices have not stabilised. Accumulating all, sentiment towards the sugar sector is positive,” said Siddharth Deshpande, research analyst, HDFC Securities.

Global prices were $16.5 a pound by the end of May as compared to $13 a pound in September 2015, on a three to four mt supply deficit forecast.

At home, a recent study by rating agency ICRA forecast no major implications of the 20 per cent export duty on mills’ profitability.

According to Sabyasachi Majumdar, senior vice-president: “Domestic sugar realisations (at around Rs 35,000 a tonne in northern India and Rs 33,000 a tonne in southern and western India) are already higher as compared to current export realisations (Rs 32,000 a tonne for shore-based players at current international prices of $500 a tonne), even without the impact of export duty. Further, with domestic consumption (at around 25.5 mt) likely to be higher than the domestic production (25.2 mt) for SY2016, marketability of domestic sugar is also unlikely to be a challenge.”

“Thus, it is unlikely that mills would have been exporting any significant quantities of sugar even without this additional duty. However, this imposition might dampen prospects of further price rise, first by discouraging additional exports (which can result in a price rise in a tight market scenario) and, second, by demonstrating government intent to restrain price rise.”

After a marginal decline in February, the price uptrend continued during March and April, following expectations of a decline in sugar output for 2016 from all leading producers. There also was a significant rise in international prices during May and June.