Sugar stocks surge up to 20% on drop in production, muted recovery

In Q4FY25TD, sugar prices in key states are up ~7-9 per cent QoQ; as a result, sugar division profitability is likely to remain robust in Q4FY25, according to JM Financial Institutional Equities.

Shares of sugar companies soared by as much as 20 per cent on the BSE during Tuesday's intra-day trading, driven by expectations of a significant drop in sugar production across the top three states — Maharashtra, Karnataka, and Uttar Pradesh.

 

According to a PTI report, India's sugar production has fallen by 16.1 per cent to 23.71 million tonnes so far in the 2024-25 season.

 

The National Federation of Cooperative Sugar Factories (NFCSF) has revised its sugar production estimate for the current season to 25.9 million tonnes, a sharp decline from the 31.9 million tonnes produced in the previous season.

 

 

This forecast deviates notably from the Indian Sugar Mills Association's (ISMA's) initial projection of 27.2 million tonnes.

 

NFCSF data indicates a significant dip in Maharashtra’s output, which fell to 7.9 million tonnes by March 15, down from 10.04 million tonnes the previous year.

 

In the stock market, shares of Uttam Sugar Mills hit the 20 per cent upper circuit at ₹230.75 on news from India Ratings and Research (Ind-Ra) that the company’s earnings before interest, tax, depreciation, and amortisation (Ebitda) are expected to recover by FY26, fuelled by higher sugar and ethanol sales, a rise in sugar prices, and investments in operational efficiency.

 

While ethanol sales in the first nine months of FY25 remained flat at 45.5 million litres, a higher allocation for the 2025 ethanol supply year (ESY25) suggests a rebound in demand following the government's lifting of restrictions on the diversion of sugar for ethanol production.

 

However, Ind-Ra cautions that lower sugar recovery could lead to reduced production in FY25, potentially impacting net working capital and increasing leverage. Yet, a gradual reduction in inventory and Ebitda recovery is expected to improve leverage by FY26. 

 

Other sugar stocks also saw significant intra-day gains, with Magadh Sugar & Energy surging 14 per cent to ₹585 apiece, Avadh Sugar & Energy rising 10 per cent to ₹429.5 apiece, and Dalmia Bharat Sugar and Industries climbing 9 per cent to ₹344.50.

 

On the broader market front, the BSE Sensex gained 1.6 per cent, reaching an intra-day high of 75,385.

 

Amid lower sugar recovery, India’s sugar production for the 2024-25 season is expected to fall short of previous estimates. In response to rising fixed costs, sugar mills have raised prices, leading to a 7-9 per cent quarter-on-quarter increase in sugar prices across key states from January to March (Q4FY25).

 

Profitability for sugar mills is likely to remain robust, according to analysts at JM Financial Institutional Securities.

 

Despite strong sugar prices, the ethanol division may face margin pressure. Analysts point out that the distillery sector is unlikely to see significant margin improvements in Q4FY25 due to unchanged ethanol prices from B-heavy and juice routes.

 

In addition, the Indian government is working with Niti Aayog on a roadmap to increase ethanol blending to 25 per cent from 20 per cent. This increase in blending could drive a 25 per cent boost in ethanol demand, further supporting the sugar industry's prospects. Long-term policy triggers are expected to favour the sector, though near-term policy changes may create some temporary challenges, according to analysts at Elara Capital.