Sugar stocks trading weak on subsidy squeeze may be an anomaly

Friday’s fall in sugar was, however, an aberration. The sector has been an outperformer due to a combination of higher sugar prices and low raw material (sugarcane) prices
Sugar stocks retreated on Friday after the central government cut subsidy on sugar exports. The combined market capitalisation (m-cap) of the country's top 15 sugar manufacturers was down 2.8 per cent on average on Friday. In comparison, the benchmark BSE Sensex closed the day with gains of nearly 2 per cent to reclaim the 50,000-level. 

Friday's fall in sugar was, however, an aberration. The sector has been an outperformer due to a combination of higher sugar prices and low raw material (sugarcane) prices. 

The Uttar Pradesh (UP) government - the country's largest sugar-producing state - has not raised cane prices for four years. There has been a steady rise in the margins and profitability of listed sugar companies - a majority of them having factories in UP. 

The combined m-cap of these top sugar manufacturers has jumped more than 3x since March 2020, against 72 per cent rally in the benchmark BSE Sensex during the period. 

The sugar companies in the Business Standard sample closed Friday with a combined m-cap of Rs 31,600 crore, against Rs 10,000 crore at the end of March last year.

Analysts expect the sugar rally to resume after a brief hiatus, as the cut in export subsidy will have no material impact on the sugar companies’ realisations - price that they get for every kilogram (kg) of sugar sold - or their margins.

"A subsidy cut of 32 per cent on sugar exports is not expected to impact export realisations, as higher global sugar prices and a weaker rupee are expected to offset the reduction in subsidy. During the period October 2020-April 2021, global white sugar prices have risen sharply by 18 per cent and the Indian rupee weakened by 1.5 per cent on-year," says Hetal Gandhi, director, CRISIL Research. 

CRISIL says global prices will continue to remain at the current levels till the end of the season - at around $425-427 per tonne up to September 2021. The government has a margin to cut export subsidies further by 17-18 per cent without having any effect on export realisations for sugar exporters.

According to CRISIL’s calculations, in the current crushing season, export subsidy accounted for around 10 per cent (Rs 4/kg) of the total export realisations of sugar manufacturers (Rs 35/kg).

In the first three quarters of FY21 (or 9MFY21), the industry reported core operating margin (excluding other income) of 7.1 per cent, up from 6.1 per cent in 9MFY20 and just 0.7 per cent in 9MFY19.

The industry net sales were up 17.8 per cent year-on-year (YoY) during April-December 2020. The double-digit revenue growth for the industry came against the background of a revenue contraction for the rest of the manufacturing sector due to the first wave of Covid-19 lockdowns in 2020. 

In the same period, the core operating profit from operations was up 37 per cent. The headline net profit was, however, down 50 per cent YoY due to lower other income. 

Shree Renuka Sugars - the country's top sugar maker by revenue - had reported exceptional gains of Rs 3,059 crore in Q2FY20, boosting the industry's headline profits in FY20. 

Higher realisations and margins have resulted in a steady rise in the industry’s net sales and profits on a trailing 12-month basis, making it one of the top performing sectors on the bourses.

Experts believe a combination of low cane prices and rising international prices has created a favourable environment for the Indian sugar industry.

“In May 2021 (up to May 19), international sugar prices touched a four-year high as white sugar prices in London and raw sugar prices in New York averaged at $461.8 per tonne and US cent 17.4 per pound, respectively. Such high price levels for both these varieties were witnessed earlier four years back in the initial months of 2017,” wrote Madan Sabnavis, chief economist, CARE Ratings.

This current tailwind for sugar stocks is expected to last for a while, as most commodity prices are on an upward trajectory and expected to remain firm, given the global inflationary expectations.

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