Sugar Stocks Surge; A New Sweet Spot?

On Nov 10, Monday, shares of sugar companies surged magnificently. Main players of this Dalal Street rally were Balrampur Chini, Dhampur Sugar, and Shree Renuka Sugars. Their stocks surged up to 7%. There were two major policy announcements from the Government of India (GoI) that triggered this bullish stampede.

1. A decision to allow sugar exports of 1.5 mn tonnes for the 2025-26 season
2. A hallmark move to abolish the 50% export duty on molasses

Investors seem to have perceived these moves as a major boost to the industry's profitability ahead of the new sugar season. With the market reacting so decisively, there is an important question for the investors: is this a short-lived sugar rush, or has the GoI just laid the foundation for a sustainable rally?

Why The Sudden Policy Shift?

The GoI’s move was a necessary intervention to solve a massive, looming problem. This is the concern of having a sugar surplus.

Here is the math. For the 2025-26 season (running from Oct to Sept), sugar production is estimated at a massive 34 mn tonnes. However, the domestic demand is only pegged at 28.5 mn tonnes. This would leave a 5.5 mn tonne surplus hanging over the market. This problem was made worse by the underperformance of the GoI’s other priority i.e., ethanol. Last season, ethanol production was projected to hit 4.5 mn tonnes but it could only reach 3.4 mn tonnes. This shortfall meant less sugarcane was diverted from sugar production, adding directly to the glut.

This 5.5 mn tonne surplus, if left unattended, would crush domestic sugar prices and destroy mill profitability. Furthermore, it might also result in delaying payments to sugarcane farmers, which is a politically sensitive issue. Now that the problem is so clearly defined, are the government's two new solutions the right medicine?

What Do These Two Levers Actually Do?

This two-pronged policy announcement can tackle the surplus problem from both ends.

1. The Molasses Duty Cut - Molasses is a main by-product of sugar production. It is used heavily in the distillery and ethanol industries. A 50% export duty was making Indian molasses uncompetitive globally. However, by scrapping this tax entirely, the GoI has unlocked a new, high-margin revenue stream for sugar mills. They can now export this by-product at competitive global prices, thereby improving their cash flow and profitability.

2. The Export Quota - Allowing 1.5 mn tonnes of sugar to be sold overseas can be a strategic "safety valve" for the domestic surplus. Thus, mills can offload a significant chunk of their inventory at global prices. This can prevent a price crash at home.

However, this quota has a "catch." Reportedly, the industry was lobbying for a 2 mn tonne export quota. The GoI's 1.5 mn tonne approval is a cautious green light showing that they are still trying to balance the needs of the mills with its primary goal of ensuring domestic price stability and controlling inflation. With these new policies in place, what should investors be watching for?

Path And The Risks

Bulls are ruling the sugar stocks at the moment. Mills have two new, strong revenue streams that were earlier restricted just a week ago (the global sugar sales and global molasses sales). This can improve cash flow, which in turn could mean:

• Stronger balance sheets
  
• Better profitability
  
• A more stable environment for farmer payments.
  

The rally in stocks like Balrampur Chini is a direct reflection of this new, more optimistic outlook. Furthermore, higher exports from India, the world's second-largest sugar producer, could put pressure on the benchmark New York and London futures. Currently, these indices are hovering near five-year low (Reuters).

However, investors should be aware of risks that are not yet resolved. The quota is simply a band-aid and not a cure. The 1.5 mn tonne quota falls short in comparison to the 5.5 mn tonne surplus. The GoI is only allowing a fraction of the surplus to be exported, focussing more on inflation control.

In conclusion, the market's euphoric reaction is understandable. However, the final approval for the quota would remain the main hurdle. So, investors will now be watching for that final GoI’s signature and, more importantly, any new signals on the long-term ethanol policy, which has remained the true, structural driver for the sector.

Source

Scanx trade
The Economic Times
Business Standard
Reuters
InvestingDotCom