Sugar stocks in sweet spot with supply shortage looming large
Shares of sugar companies soared on Thursday on news reports that output in Maharashtra, India's highest-producing state, could fall in the 2023-24 crop year to its lowest in four years. This could lead to higher sugar prices and boost the profitability of top companies in the sector, said analysts.
Sakthi Sugars jumped 11.3%, Dhampur Sugar gained 10.4%, Dwarikesh Sugar rose 9.8%, Bajaj Hindusthan advanced 7.2% and Balrampur Chini moved up 4.8%.
A Reuters report said Maharashtra's sugar output could fall 14% in the 2023-24 crop year due to lower cane yields following the driest August in more than a century.
Maharashtra, Uttar Pradesh, and Karnataka are among the top sugarcane-producing states in the country, and a dry spell because of the El Nino effect will likely affect supply.
Sugar companies are expected to witness strong earnings growth till FY26, according to brokerage DAM Capital.
«We believe fast developing El Nino conditions would further hamper sugar production in these states and keep domestic sugar prices above ₹37/kg,» said DAM's analyst Sanjay Manyal in a note to clients.
«This would benefit UP sugar companies with higher sustainable sugar volume and higher sugar realisation.» The brokerage has buy ratings on Balrampur Chini, Triveni Engineering, Dalmia Bharat Sugar and Dwarikesh.
Brokers said another reason for the increased investor interest in sugar companies could be higher ethanol blending targets announced by the government. «Nitin Gadkari (Road and Transport Minister) recently increased the ethanol blending target in petrol to a 20% level and also pushed the timeline to do the same,» said Dharan Shah, founder of Tradonomy, a Mumbai-based investment advisory firm.
