Sugar stocks can be your investment sweetener; here's why
There is hope that sugar inventory levels may come down to around 8 million tonnes by September 2021 with the aggressive exports and diversion towards ethanol
Sugar stocks have been buzzing on Dalal Street due to the stellar return they have delivered since the beginning of the lockdown in March 2020. Market analysts believe that rising global prices and ethanol production have aided sentiment towards the industry.
As a result, all the listed sweetener stocks on BSE have delivered a positive return to investors during the past year. With a rally of 284%, Gayatri Sugars emerged as the top gainer on the list. The scrip has advanced to Rs 1.92 from Rs 0.50 on March 23, 2020. It was followed by Dalmia Bharat (up 241%), Rana Sugars (up 215%), EID Parry (up 195%) and Shree Renuka Sugars (up 167%).
ICICI Securities said, “With the government’s aggressive stance on increasing ethanol blending with petrol to levels of 20% by 2025, the industry is undertaking huge capacity expansion programmes to meet the ethanol requirement of 10 billion litres by 2025. We believe this distillery capacity addition to utilise the B-Heavy and sugarcane juice route to produce ethanol, would be earnings accretive after the significant increase in ethanol prices in the last two years. Also, higher sugarcane diversion towards ethanol production would keep sugar inventory levels in check, significantly de-leveraging industry balance sheet.”
Balrampur Chini, Bajaj Hindusthan Sugar, Bannari Amman Sugars, Triveni Engineering, Dhampur Sugar Mills, Vishwaraj Sugar Industries, KM Sugar Mills, Dwarikesh Sugar Industries, Mawana Sugar, Dhampure Speciality Sugars and Uttam Sugar Mills also delivered over 100% return to investors during the past one year.
There is hope that sugar inventory levels may come down to around 8 million tonnes by September 2021 with the aggressive exports and diversion towards ethanol. “We believe the industry would be able to maintain sugar inventories at 6-8 million tonnes in future with increasing sugarcane diversion towards ethanol. This would result in domestic sugar prices moving up to reasonable levels. We believe higher domestic prices would also improve the profitability of sugar companies, going forward,” ICICI Securities said adding ethanol blending may open one more revenue stream for sugar companies.
Given sugar companies would be commissioning or completing capacity addition in the next two years, market watchers believe that the industry should see a considerable improvement in earnings trajectory.
Other sugar majors including DCM Shriram, Ugar Sugar, Avadh Sugar, Simbhaoli Sugar, Magadh Sugar, KCP Sugar, Sakshi Sugars, SBEC Sugar and Sir Shadi Lal Enterprises have also gained between 47% to 100% during the past year.
Should you invest?
While retaining a ‘buy’ call on Balrampur Chini (target price: Rs 285) and Dalmia Bharat Sugar (TP: Rs 225), brokerage ICICI Securities believes that sugar stocks are trading at attractive multiples. It believes multiple re-rating is imminent.