Sugar stocks turn bitter as govt steps in to check prices; analysts say worries overrated

The government decided first to restrict sugar exports, and then to extend the restrictions beyond October 31 without specifying an end date.

Sugar stocks saw heavy selling on December 6, following a government meeting aimed at controlling domestic sugar prices by diverting supplies away from ethanol production. The move, if taken, will likely put investors and companies in a dilemma. At a meeting earlier this week, officials reportedly took a call to stop production of ethanol from sugarcane juice and B-heavy molasses with immediate effect.

In recent years, sugar stocks have rallied riding on booming ethanol demand from oil companies as India wants to achieve 20 percent ethanol blending in transport fuel by 2025. If the government diverts supply from ethanol units, the blending target will also be at risk.

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Shares of sugar companies fell up to 11 percent on December 6. Uttam Sugar was the biggest loser, followed by Avadh Sugar, Magadh Sugar, Balrampur Chini, Triveni Engineering and Bajaj Hindusthan Sugar.

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Worries over falling sugar production may have prompted govt action

The sharp selloff reflects concerns over government interventions. Moreover, nagging worry over supply side pressure, thanks to lower sugarcane production due to El Nino is already keeping them on their toes.

Indian Sugar Mills Association (ISMA), a trade body of sugar producers, last month said India's sugar production may fall 8 percent to 33.7 million metric tons (without considering diversion towards ethanol) in the 2023/24 marketing year, which started on October 1 as lower rainfall in key producing states could dent yields.

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In August, ISMA had forecast sugar production of 36.2 million tons in the current season. The contraction in estimates is likely pushing the government officials for action.

Govt move to check sugar prices from rising ahead of elections 2024

The government decided first to restrict sugar exports, and then to extend the restrictions beyond October 31 without specifying an end date. The restriction and the recent ethanol meet are aimed at keeping sugar prices from soaring, especially ahead of 2024 general elections.

“The government wants to manage prices in an election year,” said Kranthi Bathini, Director - Equity Strategy at WealthMills Securities, a Mumbai-based boutique broker. “I am neutral on sugar stocks in the short term. However, the long term story of ethanol is intact.”

Sugar stocks, after special emphasis on ethanol, have turned into structural play rather than cyclical plays which they used to be earlier – with their fortunes linked with sugar prices. However, the policy flip-flops may give the wrong signal to the market, say some analysts.

Though not everyone is worried, especially in the face of the higher demand in the international market than the supply. Manish Bhandari, Director and Principal Officer of Vallum Capital Advisors, said, “The market will have to give good price to sugar if the prices are higher in the international market.”

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