What is so sweet about the Indian sugar story?

Most sugar st ocks, even t he t inier ones, have been consist ent ly hit t ing 52- week highs and
out perf ormed t he Nif t y and t he Sensex.
India Infoline News Service | Mumbai | May 6, 2021 9:12 IST

In the last few months, especially

since the beginning of 2021, the one
sectoral story you would not have
missed is sugar stocks. Most sugar
stocks, even the tinier ones, have
been consistently hitting 52-week
highs and outperformed the Nifty and
the Sensex.

Quick look at Indian sugar st ocks

For a sector that has done so well in the recent past, the sugar industry has an
awfully low representation in the market capitalization.

CMP Year t o Dat e Ret urn from Market Cap

Company Name
(#) Ret urn (%) 52-week low (%) (Rs. Crore)
EID Parry ₹ 421.55 22.54% 204.70% ₹ 7,466
Balrampur Chini ₹ 318.15 84.81% 284.01% ₹ 6,681
Triveni Engineering ₹ 132.75 85.92% 282.56% ₹ 3,209
Shree Renuka Sugar ₹ 12.03 -0.91% 186.43% ₹ 2,561
₹
Bannari Amman 36.35% 141.46% ₹ 2,422
1,931.65
Dalmia Bharat Sugar ₹ 283.65 97.25% 415.73% ₹ 2,296
Dhampur Sugar ₹ 265.35 57.38% 203.95% ₹ 1,762
 Andhra Sugar ₹ 425.95 34.37% 115.67% ₹ 1,155
Bajaj Hindustan ₹ 9.07 47.00% 140.58% ₹ 1,028
Dwarikesh Sugar ₹ 49.50 59.94% 200.00% ₹ 932
Avadh Sugar ₹ 307.00 43.19% 160.94% ₹ 615
Uttam Sugar ₹ 143.50 43.43% 170.75% ₹ 547
Weight ed Avg Ret urns 52.65% 232.23% ₹ 30,673
Data Source: BSE (# - closing price on 05 May 2021)

There are about 30 sugar stock listed on the BSE with a combined market cap of
Rs33,500cr. Out of these, the top-12 sugar stocks have a combined market cap
of Rs30,673cr accounting for 92% of the sugar market cap. Apart from the
concentration of few sugar stocks, the overall market capitalization of sugar
sector is just around $4.50 billion.

The two largest global sugar companies; Cosan of Brazil and Savola of Saudi
Arabia, have a market cap more than the Indian sugar industry. Disaggregation of
sugar production is a major handicap to valuation in India. That is ironic for the
world’s largest sugar producer. Despite sugar stocks yielding 52.65% YTD in 2021
and 232.23% from 52-week lows, sugar sector remains a marginal player in Indian
markets. That is the big opportunity.

Brazil’s export losses could be India’s export gains

You spent your school years learning that Brazil was the largest producer of
sugar but today it is India that is the largest sugar producer in the world.

Sugar Product ion Sugar Consumpt ion Sugar Export s

Producer (Million MT) Consumer (Million MT) Export er (Million MT)
India 29.66 India 25.51 Brazil 17.89
Brazil 29.17 EU-28 18.11 Thailand 10.41
EU-28 16.65 China 16.20 India 4.02
Thailand 14.05 Brazil 10.55 Australia 2.71
China 10.57 The US 10.24 Mexico 2.34
Data Source: International Sugar Organization

The above table captures the world’s largest producers, consumers and
exporters of sugar. Clearly, Brazil and Thailand have long been major sugar
exporters. India was also the largest consumer of sugar by a huge margin so the
surplus was never there to export. There was a reason for that. Sugar in India
was always a shortage story and hence cyclical. Higher supply would have
pressured sugar prices, which was politically sensitive.

Now for the Brazil story! For April 2021, sugar output in Brazil was down 35% and
that is believed to open up a huge opportunity for Indian sugar mills. In the
current sugar season (Oct-20 to Sep-21), Indian sugar output is expected to
increase by 4.1 million tonnes and it is expected to export in the range of 5.5-6.0
million tonnes.

With Brazil suffering from lower sugarcane crop yields due to unfavourable
monsoon conditions, the global sugar demand/supply equation is likely to remain
tight. That is going to be a sweet spot for Indian sugar mills. Sugar analysts
expect India to touch record sugar export targets of 6.0 million tonnes in the
current sugar cycle.

Indian sugar sect or is less cyclical now

That is the big story that is driving sugar stocks higher. This needs to be
understood on two fronts; the export opportunity and the ethanol opportunity.
Let us look at the export opportunity first.

The median annual sugar supply has drifted to a higher plane from 25-27 million
MT to above 30 million MT. That leaves a bigger export surplus since sugar
consumption has tapered with rising health consciousness. Sugar demand is
predominantly institutional and comes from confectionaries, bakeries,
restaurants and hotels. With most sectors under strain, the result is visible in a
larger export surplus.
The second is the ethanol opportunity. In the current sugar year 2020-21, Indian
sugar mills will supply 3.25 billion litres of ethanol to oil companies. That would
imply an 8.5% ethanol blending in petrol. The government has already pulled back
the 20% ethanol blending target date from 2030 to 2025. The sweet spot for
sugar mills is the export subsidy of Rs3500cr this year and robust ethanol
margins at 11.5%.

What does t his mean for sugar st ocks?

We are back to the rally in sugar stocks! Remember, 53% returns on sugar sector
stocks in 4 months is big story when the Nifty and Sensex have virtually done
nothing. Export subsidies, robust sugar prices and attractive ethanol margins will
ensure weak sugar mills survive. The real value accretion will be for well-
managed sugar companies as they can generate enormous cash flows from
sugar. That is what markets are betting on sugar stocks for!