In a time as short as two months, the fortunes of sugar stocks seem to have drastically changed in the stock market. As today's chart shows, many like Dalmia Bharat Sugar and Dhampur Sugar Mills are up more than two to two-and-a-half times. The traded volumes of sugar stocks too have gone through the roof.
What's the reason for this? The biggest reason is a surge in sugar prices. As per reports in business daily Business Standard, international sugar prices have gained 30% on the back of an expected decline in global output. Production in Brazil remains affected by drought conditions and increased ethanol usage. Citing JPMorgan data, the daily goes on to observe that sugar output in China is likely to fall 11% compared to that of the previous year, while the EU's production is also down 20%. In India production may decline 4.6% YoY as per ICRA. All this is expected to give a boost to realisations for sugar companies.
But do these developments justify the kind of spectacular rise seen in the stocks of sugar companies? We don't think so. Why is that? Because events such as these do not do much to change the fundamentals of sugar companies. Sugar prices will rise, and they will fall. That doesn't mean it is a good idea for investors to correspondingly go in-and-out of sugar stocks. In the Indian context, a reform like linking end-sugar pricing to cane prices paid to farmers would be a better reason for sugar stocks to see such a sharp re-rating.