Sugar stocks soar as Maharashtra output set to fall to lowest in 4 years; DAM Cap says ‘buy’

DAM believes valuations are attractive at current multiples.

Sugar stocks soared on September 14, after a dry August month prompted officials to cut Maharashtra state output forecast by 14 percent in 2023/24 crop year to the lowest in four years. Major sugar stocks including Balrampur Chini Mills, Dalmia Bharat Sugar, Triveni Engineering and Dwarikesh Sugar jumped as much as 12 percent following the news report.

Broking firm DAM Capital initiated coverage on sugar stocks, with a ‘buy’ rating on all four. It projected strong growth for the sugar companies on the back of expected higher prices. The analysts at the brokerage project potential gains of up to 29 percent in sugar stocks in the next 12 months.

Maharashtra state accounts for more than one-third of India's sugar output, and could produce only 9 million metric tons in the 2023/24 season, beginning October 1, down from 10.5 million tons in 2022/23, Reuters reported citing B B Thombare, president of the West Indian Sugar Mills Association. This could result in rising sugar prices both in global as well as domestic markets.

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What's causing Dam analysts to be bullish?

El Nino coming in handy: DAM Capital in its note said that fast-developing El Nino conditions are expected to further affect sugar production in key sugar-growing states and keep domestic sugar prices above Rs37 per kg. "This would benefit Uttar Pradesh-based sugar companies with higher sustainable sugar volume and higher sugar realization," the brokerage stated on September 13.

Ethanol blending: In the last five years, the government has been able to increase ethanol blending with petrol from 1.5 percent in 2018 to 11.5 percent in 2023. The government aims to increase it to about 20 percent levels by 2025-26,  resulting in further capacity addition in the next few years. During the G20 Summit, Prime Minister Narendra Modi also launched the Global Biofuel Alliance which could further help sugar companies.

Declining production: Amidst the fall in production, India is unlikely to export any sugar. Moreover, export from Thailand, one of the world's leading producer, is also likely to come down due to the expected lower production. This is expected to result in a surge in global sugar prices.

Valuations: Given the strong earnings growth on the back of higher sugar prices and an increase in ethanol volumes owing to the completion of a large distillery capacity expansion, DAM believes valuations are attractive at current multiples.

At 12:32 pm, Balrampur Chini was trading 6 percent higher, while Dalmia Bharat Sugar was up 12 percent. Meanwhile, Triveni Engineering and Dwarikesh Sugar traded 7.5 percent and 11 percent higher, respectively.

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