Sugar stocks soared up to 20% Tuesday after the Centre lifted all quantitative curbs on the production of ethanol from sugarcane juice, sugar syrup, and all forms of molasses for the upcoming sugar season, boosting investor sentiment toward these stocks. Analysts said the move is expected to improve profitability and an anticipated uptick in ethanol prices could provide further boost to these stocks.
"The government notification on Monday said sugar companies can use sugarcane for ethanol production, which was not permitted last year," said Sunny Agrawal, head of Fundamental Equity Research, SBI Securities. "This led to the surge in stock prices as ethanol distillery is the key growth driver for these companies." Agrawal said the Supreme Court refused to entertain the PIL against the 20% ethanol-blended petrol rollout, which indicates that the demand for ethanol will remain as expecte.
Since sugar companies are the largest suppliers of ethanol, this further lifted sentiment on these stocks. Rajshree Sugars and Chemicals surged 20% while Shree Renuka Sugars jumped 13.1% on Tuesday. Avadh Sugar and Energy gained 4.8% while Balrampur Chini Mills and Bajaj Hindusthan Sugar climbed 4.5% each.
"The expectation of a bumper sugarcane production this year and the government's timely announcement ahead of the season that commences in November could improve the profits," said Pratik Tholiya, senior vice president - Institutional Equity Research, Systematix Group. "Since the sugar stocks have been beaten down for the last one year, the news led to euphoria in the stocks today."
Tholiya said profits for sugar companies have remained under pressure due to higher cost of production and the cap on ethanol prices. "If the government revises ethanol prices upwards; an announcement is expected around October, then it can improve profits and sustain the momentum in these stocks, resulting in one of the best years for the industry," he said. "Balrampur Chini is a top stock pick."
Sugar companies are demanding upward revision in ethanol and minimum support prices of sugar. Both the factors can accelerate earnings growth for sugar players, said analysts. "The government seems to be comfortable with the sugar demand-supply dynamics," said Agrawal.
