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Well-managed companies could generate enormous earnings or cash flows.
Sugar sector | Sugar stocks | Stocks to buy: Hopes of better earnings and government measures to support the ailing sugar sector have helped investors to get a healthy return from the sector during the past one year. Market watchers believe that the sector has drifted away from cyclicality (in terms of sugar prices) as well as from partial deregulation (it is fully regulated now and is likely to remain so in the foreseeable future).
This has been led by structural oversupply in terms of sugar production, the government’s efforts on the Ethanol Blending Program through robust ethanol prices and the government’s objective to ensure sugarcane farmers are paid without significant arrears. As a result, all the 29 stocks in the sector have managed to deliver a positive return to investors since April 20 last year despite uncertainty over the Covid-19 pandemic.
Top sugar stocks
With a rally of 282%, Gayatri Sugar emerged as top gainer in the pack. It was followed by Dalmia Bharat Sugar (244%), Triveni Engineering (180%), Rana Sugar (170%), Balrampur Chini Mills (up 141%), Dhampure Speciality Sugars (up 120%) and EID Parry (110%). Other stocks including Dhampur Sugar Mills, Shree Renuka Sugars, Vishwaraj Sugar Industries, KM Sugar Mills and Mawana Sugar also rallied between 52%-245%. On the other hand, benchmark BSE Sensex has gained nearly 51% during the same period.
Sectoral outlook
Commenting on the government policies and sugar sector, brokerage JM Financial said, “Government policies (sugarcane price, minimum support price, buffer stock, export subsidies, ethanol prices) would ensure the survival of the weakest. Hence, well-managed sugar companies could generate enormous earnings or cash flows in the process.”
It believes that ethanol prices are currently significantly above petrol and alcohol import parity prices as the government is aiming at twin objectives: a) surplus sugar being diverted to ethanol (reduced subsidy burden), and b) a reduction in carbon emissions and dependence on crude imports.
“We expect strong cash flows for at least 2-3 years for well-managed sugar companies,”
Investment options
JM Financial said, adding it has maintained a ‘Buy’ call on EID Parry with a price target of Rs 430. The brokerage believes that an operational profitability improvement of the company to boost stock performance going ahead. JM Financial has also upgraded the second-largest producer Balrampur Chini to ‘Buy’ from ‘Hold’ with a price target of Rs 300.
At present, ethanol capacity in India stands at around 4.75 billion litres which are in line with the requirement for a 10% blending target by 2022. To meet the set target of 20% blending by 2025 the total ethanol requirement will be 10 billion litres for which the total ethanol capacities in India are required to be around 12 billion tonnes. Out of this 10 billion litres of ethanol 6.5 billion litres are expected to come from sugarcane while the balance of 3.5 billion litres are expected to be produced using damaged food grains and rice.
Dolat Capital believes that given the visibility of production in ethanol being the highest for Balrampur Chini, the company appears to be the best play in the sugar sector.