Sugar Sector has hit a sweet spot lately, thanks to favorable policy push and government intervention.
Indian sugar companies are poised to see healthy growth in sugar as well as distillery businesses.
While the implementation of MSP for sugar has addressed the long-standing structural issue of cyclicality in the sector, aggressive capacity expansion in the distillery segment riding rising ethanol prices and high demand from the oil industry portend high growth and robust profitability.
Not to forget, rising global raw sugar prices along with hefty export incentives extended by the government, Sugar mills are expected to export 5-6mt sugar in SY20.
According to the International Sugar Organization forecast, the world sugar deficit is pegged at 61.2 Lakh tonnes as compared to the earlier forecast of 47.6 Lakh tonnes.
This change has been driven by lower output from major producing countries, such as India, Thailand, the EU, and Central-South Brazil.
The higher estimated deficit also has led to global sugar prices increasing to US cents 13.3 per pound in December 2019, up 5% on the month.
Domestically, the sugar production is expected to fall due to a lower cane crushing.
Locally, Sugar makers namely Balrampur Chini Mills (BCML), Dwarikesh Sugar Industries, Ponni Sugars (Erode), Dharani Sugars & Chemicals, Sir Shadi Lal Enterprises, Gayatri Sugars, Shree Renuka Sugars, Indian Sucrose, Triveni Engineering & Industries, and Avadh Sugar are set to reap rich rewards.
In the recent past, the government initiated several steps to support sugar millers.
It raised sugar MSP to Rs 31 per kg; reintroduced sugar-selling quota; and incentivized exports.
These measures have helped curb the cyclical nature of the sector and made it more predictable.
On the production front, sugar production is estimated to fall 19% in SY20, helping lower the high inventory level and also reduce oversupply.
Domestic sugar prices have now started to rise with the expectation of a dip in production in SY20 as well as a global rally in raw sugar prices.
Additional benefits are set to accrue from higher ethanol production.
In order to fulfill the mandated blending ratio, oil companies have tendered orders for 5.11bn lt of ethanol, of which, sugar companies have managed to meet a mere 3.55bn lt.
However, most sugar companies are aggressively building new capacities to capture the opportunity.
Hence, we expect the distillery business to continue to drive growth in the medium term
Net net we think the cycle for sugar companies could now turn for the better ahead in the next 12 to 15 months and benefit large integrated sugar players both from rising sugar prices and rising ethanol offtake
We think the Jan to March quarter will be watched closely by markets to see whether rising sugar prices get reflected in better profitability for players here.
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