Sugar stocks trade weak in a firm market on reduction in export subsidy

Shares of sugar manufacturers were trading weak (down by up to 8 per cent) on the BSE in intra-day trade on Friday in an otherwise strong market after the government slashed subsidy on sugar exports from Rs 6,000 per tonne to Rs 4,000 per tonne with immediate effect in view of firm global prices.

Dalmia Bharat Sugar and Industries, Bajaj Hindustan Sugar, Dhampur Sugar Mills, Dwarikesh Sugar Industries, Balarampur Chini Mills, Uttam Sugar Mills and Avadh Sugar Mills were down 3 per cent to 5 per cent on the BSE. Praj Industries, engaged in the business of process and project engineering, dipped 8 per cent to Rs 350 in intra-day trade today. In comparison, the S&P BSE Sensex was up 1.4 per cent at 50,263 points at 11:55 am.

Most of these stocks had outperformed the market by a huge margin, after reporting a strong set of numbers for the quarter ended March 2021 amid rising sugar prices in global market.

On Thursday, the government reduced the export subsidy from Rs 5.85 / kg to Rs 4.0 / kg on any sugar contracted for export on or after May 20, 2021. It is important to note that 5.7 million tonnes (MT) out of 6.0 MT has already been contracted for the 2020-21 season.

“Current global white sugar prices are trading at Rs 33/ kg (Indian equivalent price). These prices are remunerative without any sugar subsidy by the government. We believe the government’s decision is an indication that it may reduce or eliminate sugar subsidy for the 2021-22 sugar season. This would keep global prices firm and ensure that sugar millers continue to export additional quantities under OGL (without subsidy) at remunerative prices,” ICICI Securities said in a note.

Some of the market indicators suggests that around 50,000 tonnes of exports that have already been contracted from Maharashtra under OGL & any price above US$470/tonne would also attract exports from UP under OGL. We believe additional 1-2 MT of exports can be easily contracted under OGL in 2020-21 season itself. This would further rationalize inventories and keep domestic prices, the brokerage firm said.

“We reiterate our positive stance on India’s sugar industry as it is well poised to benefit from global and domestic factors. Lower output from countries like Brazil, Thailand and the EU would keep supplies tight and global prices firm, enabling India to increase exports. On the domestic front, favorable policies, rising ethanol demand (blending target of 20 per cent by CY25 from 8 per cent currently), aggressive ethanol capacity addition would drive an earnings of the sugar companies,” analysts at Elara Capital in recent report.