Sugar Stocks are no Longer Sweet. Here's why Sugar Stocks are Falling...

Editor's note: Investors were thinking that the ethanol megatrend would keep sugar stocks in a 'sweet bull-run' for a long time to come.

As the world is going green like never before, shifting from fossil fuels to cleaner, more sustainable sources such as ethanol have been in demand and sugar companies are benefiting from this megatrend in a big way.

But as you already know, the sugar industry is cyclical in nature and is heavily dependent on climatic conditions.

It is also a highly regulated industry, as sugar is an essential commodity. The government steps in from time to time to keep prices in check.

And that's exactly what has happened recently which has turned the 'sweet rally' a bit sour.

On 6 December 2023, sugar stocks fell sharply following a government meeting aimed at controlling domestic sugar prices by diverting supplies away from ethanol production.

While nothing is fixed as of now, this move could likely be a dampener for sugar companies.

There was a meeting held earlier where government officials took a call to stop production of ethanol from sugarcane juice and B-heavy molasses with immediate effect.

The government's concern is justified as well. There are concerns of a global sugar shortage, thanks to lower sugarcane production due to El Nino.

Here's a table showing performance of top sugar stocks in the past two days.

Sugar Stocks Fall as Government Steps In

Company	Current Price	Price as on 6 Dec	Price as on 5 Dec	Fall in 2 Days (%)
Shree Renuka Sugars Ltd.	46.8	49.3	50.5	-7%
E.I.D. - Parry (India) Ltd.	531.0	564.7	548.5	-3%
Balrampur Chini Mills Ltd.	407.0	431.3	466.1	-13%
Triveni Engineering & Industries Ltd.	341.0	363.3	385.9	-12%
Bajaj Hindusthan Sugar Ltd.	28.2	30.3	32.4	-13%
Dalmia Bharat Sugar And Industries Ltd.	404.0	433.3	449.7	-10%
Bannari Amman Sugars Ltd.	2,435.0	2,503.3	2,518.0	-3%
Piccadily Agro Industries Ltd.	221.0	230.6	233.2	-5%
Dhampur Sugar Mills Ltd.	247.0	259.6	268.1	-8%
Uttam Sugar Mills Ltd.	395.0	445.6	501.4	-21%
Dwarikesh Sugar Industries Ltd.	85.8	90.0	91.0	-6%
Avadh Sugar & Energy Ltd.	676.0	725.3	805.6	-16%
DCM Shriram Industries Ltd.	163.0	166.5	162.9	0%
Dhampur Bio Organics Ltd.	151.0	157.4	161.4	-6%
The Ugar Sugar Works Ltd.	82.5	87.9	89.0	-7%

Source: Equitymaster

By the way, this is not the first-time sugar stocks have fallen to such heavy extent in recent past.

In 2023, sugar stocks came under pressure multiple times due to various reasons.

Continue reading to know what the reasons were back then so you could be prepared if something like that happens this time too.

Why Sugar Stocks are Falling

Remember your first best friend?

You thought that you both will be best friends forever, but life happened and you both were separated. This is extremely sad right?

Investors of sugar stocks are going through a similar feeling.

Sugar sector investors had high hopes from sugar stocks. But, recently the shares have underperformed on the bourses.

Owing to low sugarcane yields and inability to absorb fixed costs sugar stocks are falling. Sugar stocks were already under pressure because of ban on sugar exports.

The top sugar companies reported poor Q1 results adding insult to injury. Thus, sugar stocks have been battered down due to the above reasons.

However, the opportunities offered from ethanol stocks outweigh the cons of sugar sector.

Read on to find out more about the recent movements of sugar stocks.

Since the beginning of 2022, equity markets have been quite volatile. Even fundamentally strong stocks have seen a downfall in this unpredictable market.

But there was one sector where stocks were only going up. The markets were crashing but sugar stocks were enjoying the roller coaster price rise.

However, around mid-April the situation changed. Sugar stocks started dropping rapidly.

But why?

Read on to find out about the extreme movement of sugar stocks.

Why sugar stocks were rising initially

Sugar stocks have given results sweeter than sugar itself. Those who invested in sugar stocks at the start of this year were sitting on huge gains.

Then the government changed its Ethanol blending policy. It is encouraging companies to use sugarcane for producing ethanol. Ethanol can be used in the production of fuel for vehicles.

This step will not only solve the issue of scarcity of petrol but will also solve the issue of high closing stock in sugar industries.

If sugarcane is used to produce ethanol, sugar production will reduce and hence the issue of large inventories will be solved.

According to a report, 31 metric tonnes (MT) of sugar was produced in financial year 2022. This is around 11.1% higher than the production of the previous year.

According to ISMA reports, sugar exports may reach 8.5 m MT in the 2021-22 marketing year. The sugar marketing year is from October to September.

It is expected this year, there will be a global shortage in the production of sugar. Both Brazil and Thailand, the two major sugar producers, are expected to produce 7-8 MT less sugar this year. This means there will be rise in sugar exports from India.

All these reasons combined were responsible for the tremendous rise in sugar stocks.

Now let's look at why sugar stocks have come under pressure of late.

Why did sugar stocks start falling rapidly?

Around mid-April, all sugar stocks started falling rapidly. Now, this raises questions. What changed suddenly that led to the rapid fall in sugar stocks?

Earlier this week on 10 May, most sugar stocks saw a huge fall.

The reason behind this was the probable cap on sugar exports. On 25 March, it was reported that the government might introduce a cap of 8 m tonnes on sugar exports.

According to the news, the government might bring in this move to meet the demand for sugar. The demand for sugar increases around the festive season. India is the largest consumer of sugar.

It is also the second-largest producer of sugar. But still, domestic sugar prices are rising. The price of 1 kg sugar is up around 42% in the past 5 years. It was believed the cap might be introduced to control the domestic prices of sugar.

It was believed that the sugar industry would achieve the mark of 8 m tonnes of sugar exports in May. As a result of this belief, sugar stocks started falling rapidly around the end of April.

On 1 June 2022, a final order regarding the ban on sugar exports was passed.

According to the order, with effect from 1 June 2022 until 31 October 2022, or until further order, the export of the sugar will be allowed with specific permission of the Directorate of Sugar, Department of Food and Public Distribution.

Performance of Sugar Stocks

Here's how the top stocks from the sugar sector have performed of late.

Company	1 Month	YTD	1 Year
Shree Renuka Sugars Ltd.	-18%	48%	215%
E.I.D. - Parry (India) Ltd.	-5%	8%	17%
Balrampur Chini Mills Ltd.	-21%	8%	26%
Triveni Engineering & Industries Ltd.	-20%	20%	75%
Dalmia Bharat Sugar And Industries Ltd.	-26%	3%	25%
Bannari Amman Sugars Ltd.	-9%	-6%	26%
Dhampur Sugar Mills Ltd.	-31%	21%	14%
Dwarikesh Sugar Industries Ltd.	-22%	47%	96%
Bajaj Hindusthan Sugar Ltd.	-15%	-3%	8%
Avadh Sugar & Energy Ltd.	-22%	35%	94%
DCM Shriram Industries Ltd.	-10%	3%	51%

Source: Equitymaster

Most stocks have come under pressure in the past month while their performance in 2022, and over the past one year, has been exceptional.

The fall is rapid but is it for the long term?

The export ban order is restrictive in nature. It is not a complete ban, only permission will be required. However, the government may consider lifting the ban if domestic sugar prices remain under control.

Once the festive season is over, the ban may be lifted altogether.

Hence the fall may be rapid but it may not be long-term.

Note that ethanol has been a game changer for the sugar industry.

As diversification into distillery, ethanol, and electricity became possible, most sugar businesses in India are turning into integrated players. This has increased molasses demand.

But one must note that sugar stocks are vulnerable to the cyclical nature of the industry and agro-climatic risks related to cane production.

To know more, check out the below video where chartist Brijesh Bhatia shares his outlook for sugar stocks.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...