Sugar producers have outperformed the broader stock market in the past one month, on expectations that the industry’s prospects would improve following the government decision to subsidise exports of the sweetener and increase the use of ethanol, a by-product of the sugar manufacturing process.
 

The move is expected to reduce inventory levels though sugar prices may not improve in the near future, said analysts, who expect these shares to be susceptible to sharp swings in the event of policy changes.

Dharani Sugar & Chemicals soared 66 per cent in the past one month, while Balrampur ChiniNSE -1.72 % gained 35 per cent and Dhampur SugarNSE 2.27 % and Bajaj Hindusthan each advanced 33 per cent. In comparison, mid- and small-cap indices, which these stocks are part of, rose 6-8 per cent from their 52-week low hit on August 23.

Both moves are expected to reverse the industry’s woes, led by record production.

Last year, the sugar companies were struggling, with a high inventory of about 33 million tonnes in total, but that has decreased this year, said industry experts. Production is expected to take a hit next year.

“Next year’s sugar production will come down by 5 million tonnes. Drought in Maharashtra, lack of water and flood in some areas have resulted in a major yield reduction,” said Abhinash Verma, the director-general of the Indian Sugar MillsNSE -0.05 % Association (ISMA).

“Apart from export opening, the government did not resort to reduce any FRP (fair and remunerative price) this year. This has helped industries retain their profits,” said Atul Chaturvedi, CEO, Renuka Sugars

Improved prospects of the domestic sugar industry have encouraged investors to look at some beaten down stocks, boosting the delivery volumes of shares like Balrampur Chini.

“The sugar industry is going through transformational changes through various government and industry efforts. These measures can be long term, and help to escape the sectoral cyclicity and reinstate sustainable earnings for sugar companies,” said Sanjay Manyal, an analyst at ICICIdirect.com.

“Considering sustainability of earning and the fact that stocks are trading at 3-7 times their earnings, there is a high possibility of a re-rating of the sugar sector,” he said.

Amik Das of SKP Securities said investors were betting also on the government’s decision on ethanol. “The government has increased ethanol blending percentage due to which many big companies have increased their distillery capacities. We can expect companies like Balrampur Chini or Dhampur Sugar to report strong profits in the coming days,” the analyst said.