In the last few weeks, most of the sugar companies ranging from Balrampur to Dhampur to Dalmia Bharat and Triveni have all touched their 52-week highs. What is working for sugar stocks and is there a more structural shift happening?
Sugar demand has been robust
In the midst of the COVID uncertainty, the sugar demand continues to remain robust. Sugar is still a predominantly institution-demand driven product. With the sudden demand for food products on an upswing and take-away foods taking off in a big way, the domestic demand for sugar is back to peak levels. Also, the retail demand for sugar has seen an upsurge, especially, at-home demand in the midst of the lockdown and WFH times. That has also helped in keeping sugar demand at healthy levels.
Government supporting exports
In the last two sugar year (extending from October to September), the state has given liberal subsidies to sugar mills to export. In retrospect, it was a good move. The largest producer of sugar in the world, Brazil, was facing a supply crunch due to logistical constraints. That opened the doors for India to export sugar to most of the net sugar users. To support the sugar companies, due to their higher cost structures, the state has been liberal in giving subsidies. In the last two years, the export window for sugar has absorbed the sugar stock.
Ethanol is the next big trend
For too long, India had been treading cautiously on the ethanol blending front due to the sensitivity of sugar and its larger political implications. The current government has front-ended the 20% ethanol blending target for petrol to the year 2025. That means, there is a huge alternate demand for sugar emerging and absorption of supplies should hardly be a challenge any longer. Also, sugar companies in India enjoy extremely competitive margins on ethanol blending and that should have an impact on their top lines as well as on their bottom lines in the quarters to come. This boost to ethanol blending in petrol has also given a major thrust up to sugar stocks.
Shift is actually structural
Demand expansion, export boost as well as ethanol blending look like obvious answers to the question of sugar stocks. But the real point is that sugar industry in India could finally be undergoing a structural shift. If you add up the 3 factors of robust demand, export push and ethanol blending, the very structure of the sugar industry is likely to undergo a change. From being a pure commodity play relying on demand and supply, sugar now becomes a sector with a much larger role to play in the overall macro equation. Sugar mills have to worry less about cycles and stocks as now there are a plethora of applications for sugar. That is the real sweet shift!