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Why sugar stocks are not so sweet in the long run

Sugar is a cyclical industry. The fortunes of the industry ebb and flow with sugar prices, which in turn depends on sugar production and supply.

August 31, 2021 / 09:05 AM IST
 
 
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Sugar stocks have been on a roll this year. Many sugar stocks have appreciated more than 100 percent in 2021. Exuberant retail investors have been accumulating sugar stocks. Some institutional investors too have been buying. Will this investment turn out to be sweet?

Sugar is a cyclical industry. The fortunes of the industry ebb and flow with sugar prices, which in turn depends on sugar production and supply. With demand almost stable, fluctuations in production/supply causes prices to rise and fall. Particularly, crop failures in the world's largest producer Brazil, trigger sharp price rise. The industry does well when prices rise. But higher prices encourage farmers to grow more cane. In India, since farmers are assured of Minimum Support Prices (MSP), there is not much of a risk in growing more sugar. With incentivized farmers growing more, supply increases and prices fall. The cycle repeats.

Sugar prices have been rising in the global markets in recent weeks on fears of supply shortages from Brazil, the world's largest producer. Brazil's sugar crop is reported to have been hit by frost. So, the market expects sugar companies to do well. So, are sugar stocks good buys?

History tells us that sugar stocks give good trading opportunities. There can be occasional spurts on prices giving investors handsome returns in the short run. But it is important to remember the fact that sugar stocks have never been wealth creators. Take a look at the returns from sugar stocks in the decade 2010 to 2020. Balrampur Chini was around Rs 135 in January 2010; it was Rs 162 in January 2020. Shree Renuka Sugars was Rs 100 in January 2010; it was a mere Rs 10 in January 2020. Dalmia Bharat was Rs 200 in January 2010 and Rs 120 in January 2020. This 10-year return story is revealing. Sugar stocks are not wealth creators; they are not 'consistent compounders'.

Investors will be better off in the long run investing in great companies that consistently create wealth. Contrast the miserable returns from sugar stocks during 2010 to 2020 to the phenomenal returns from great stocks like Asian Paints, Pidilite, Infosys, HCL Technologies, TCS, HDFC twins, Bajaj Twins, Britannia and HUL during this period. These great companies became multibaggers and created wealth for investors. Even Nifty rose from 5,000 to around 12,200 during this period. To cut a long story short, sugar stocks occasionally give trading opportunities and short-term returns. But investors will be better off looking elsewhere for wealth creation.

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Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
VK Vijayakumar is the Chief Investment Strategist at Geojit Financial Services.
first published: Aug 31, 2021 09:05 am

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