Sugar stocks in focus; Balrampur Chini, Avadh Sugar up over 5%

 

Shares of sugar companies rallied by up to 7 per cent on the BSE on Tuesday after the industry body, ISMA, raised its sugar production estimate to 31.0 million tonnes (MT) from earlier 30.5 MT in the 2020-21 marketing season starting this month. It has also increased its sugar sacrifice estimate from 1.5 MT to 2.0 MT.

Among the individual stocks, Balrampur Chini Mills, Avadh Sugar & Energy and Dhampur Sugar Mills were up 5 per cent to 7 per cent on the BSE. EID Parry and Dwarikesh Sugar Industries were up in the range of 2 per cent to 3 per cent, as compared to 0.3 per cent gain in the S&P BSE Sensex.

As per total sugarcane expected to be available to the sugar industry for making sugar, Indian Sugar Mills Association (ISMA) estimates sugar production of 33.02 million tons of sugar in the season 2020-21.

However, since a significant quantity of sugarcane juice and B-molasses will be diverted into ethanol production, a proportionate quantity of sugar production will get reduced. With higher availability of sugarcane and surplus sugar production, it is estimated that a larger quantity of cane juice / syrup and B-molasses will get diverted to ethanol, ISMA said.

Accordingly, it is estimated that the diversion of cane juice and B-molasses to ethanol will reduce sugar production by 2 million tons in 2020-21 SS, as compared to about 8 lakh tons diverted in 2019-20 SS. However, ISMA will get a better idea of this diversion once the tenders happen and bids are given by millers for ethanol supplies, it said.

Sugar mills are expected to sacrifice sugar for ethanol production through B heavy molasses or sugarcane juice route. Also, 2,000 million litre ethanol capacities have come up in the last two years.

The sugar industry was holding 10.6 MT of inventory as of September 2020. The increase in sugar production estimate is marginal and may not impact inventory to a great extent. The government is also running a sugar export subsidy programme to reduce the excess sugar from the system, ICICI Securities said in a note.

Sugar shares rise on heavy volume; Balrampur Chini hits over 2-year high

Shares of sugar companies were in demand on the BSE, and rallied by up to 7 per cent in intra-day trade today on the back of heavy volumes.

Balrampur Chini Mills, Dalmia Bharat Sugar and Industries, Avadh Sugar & Energy, Triveni Engineering & Industries, Dwarikesh Sugar Industries and Dhampur Sugar Mills advanced in the range of 3 to 7 per cent on the BSE. In comparison, the S&P BSE Sensex was up 0.40 per cent at 41,517-mark at 02:33 pm.

Acording to industry body ISMA, India's sugar production dropped 35 per cent to 4.58 million tonne till December 15 of the ongoing marketing year, owing to sharp fall in output in Maharashtra and Karnataka. The sugar production was 7.05 million tonne on the corresponding date of previous sugar season, it added.

"Meanwhile, the supply of ethanol of about 730 million litres from sugarcane juice and ‘B’ heavy molasses is almost double that of what was supplied in the last 2018-19 Ethanol Supply Year (ESY), and, therefore, the diversion of sugar into ethanol this season is higher," ISMA said.

There is another tender expected shortly from the oil marketing companies (OMCs), against which more quantities of ethanol, including the ethanol made from ‘B’ heavy molasses and sugarcane juice, is expected to be offered for 2019-20 ESY, it added.

Analysts at ICICI Securities believe that with the liquidation of current sugar inventory and diversion of sugarcane towards ethanol, sugar companies would witness higher cash flow from operations in FY20E & FY21E.

The brokerage firm believes that with the sustainable earnings, the book values of sugar companies would grow 30-60 per cent in the next two years. Without considering any re-rating, we believe sugar companies would at least command 1.0-1.5 times one year forward book value.

Among the individual stocks, Balrampur Chini Mills hit an over two-year high of Rs 176, up 3 per cent on the BSE in intra-day trade today. The stock was trading at its highest level since November 2017.

“Sugar production in the upcoming season is now estimated to decline due to lower cane acreage in some parts of the country. So, while the sugar inventory in India remains high, the demand-supply scenario is expected to be more balanced going forward. This combined with various initiatives such as incentives on exports recently announced will lead to an overall improved operating environment in the coming quarters,” the management of Balrampur Chini Mills had said while announcing September quarter results on November 11.

With prudent capital allocation, strong cash flows, improving macros, the management is confident of creating sustainable value for all stakeholders going forward, it added.