Top 5 Sugar Stocks to Watch as Supply Crunch Drives Prices Higher

Indian sugar stocks have been in the limelight for past two weeks with marquee scrips rising as much as 15-20%.

This is amid concerns about a global sugar shortage. Avlean, the world's largest sugar trader, recently said it expects a sixth straight year of sugar deficit, as supply will be affected by a poor harvest in India.

Sugar is one of the major agro-based commodities produced around the world. India, being the largest consumer and also the second-largest sugar producer globally, plays a big part when there's a deficit or surplus.

The trouble began with below-average monsoon rains in Maharashtra and Karnataka, major sugarcane-growing regions. These insufficient rains resulted in reduced sugar production. If the monsoon doesn't improve, India might face a sugar shortage soon.

This situation has prompted investors to take a close look at sugar stocks amid hopes of higher prices, culminating in higher revenue and profit.

The sentiment was further fuelled by a report from Reuters saying India is considering banning sugar exports. If true, this will be the first time in seven years that India will ban sugar exports. This move is considered to ensure sugar availability for domestic consumption.

For investors, this appears to be a promising opportunity to potentially generate strong returns.

Here are the top 5 sugar stocks to watch.

#1 Dalmia Bharat Sugar & Industries

At the top of our list, we have Dalmia Bharat Sugar & Industries.

It's a subsidiary of the conglomerate Dalmia Bharat and one of the leading sugar manufacturers in India, with a sugar production capacity of 37,150 Tons of Cane per Day (TCD).

The company owns and operates five modern sugar manufacturing plants located in two states- Maharashtra and Uttar Pradesh.

Dalmia Bharat Sugar & Industries also produces ethanol, bagasse-based power and organic manure. Additionally, it makes organic manure from the molasses produced in its sugar mills.

While sugar accounts for more than 64% of the total revenue (fiscal 2023), the balance comes from ethanol (31%) and power segments (5%) of the business.

Between 2019 to 2023, the company's revenue grew at a healthy CAGR of 7.4%, while profits shot up at an impressive 15.4%.

The return of capital employed (RoCE) and return on equity (RoE) also stand at a decent 5-year average of 12.6% and 12.3%, respectively.

In the last three years, 40% of its investment was allocated to the ethanol business where the company perceives a disproportionate opportunity.

The company has been generating adequate surplus to plough into aggressive capacity growth.

Going forward, Dalmia Bharat Sugar & Industries aims to increase its sugar production capacity and its ethanol capacity.

The company is expanding its ethanol capacity aggressively and is expected to graduate to one of the largest ethanol producers in India. This will cost the company a total of Rs 5.5 bn.

The stock has run up quite a bit in the past few weeks. Currently, it is trading at a price-to-earnings (PE) ratio of 13.6x. While this is an 88% premium compared to its 5-year median PE of 7.2x, it's still 30% lower than the highest PE of 19.2x.

To know more about the company, check out the its financial factsheet and the latest quarterly results.

#2 EID Parry

Next on the list is EID Parry.

EID Parry is one of the leading sugar manufacturers in the country. It boasts a sugar production capacity of 40,300 TCD per day, supported by six factories.

Apart from this, it also produces ethanol, bagasse-based power and organic manure. It is also a leading renewable energy producer with solar and wind power projects across India.

Around 70% of the total revenue come from the sugar business. Apart from the domestic market, the company also exports its products (6% of revenue).

The company is a significant player in food processing, with a portfolio valued at over Rs 10 bn. Their array of food processing facilities includes rice mills, flour mills, and fruit juice plants.

Over the past five years, between 2019-23, the company's revenue has steadily grown at a commendable CAGR of 17.8%, while profits have shown an even more impressive CAGR of 28.7%.

This growth is attributable to the company's strategic moves. These include expanding sugar production capacity, boosting ethanol production, investing in renewable energy ventures and expanding their foothold in the food processing industry.

EID Parry is well-positioned to continue to grow in the future. The company is aiming high, planning to increase its sugar production capacity by 2025.

Much like its peers, the stock has run up quite a bit in the past few weeks. Currently, it is trading at a price-to-earnings (PE) ratio of 11.9x, a 21% premium to its 5-year median PE of 9.8x.

To know more about the company, check out its financial factsheet and latest quarterly results.

#3 Balrampur Chini Mills

Balrampur Chini Mills is one of the leading sugar manufacturers in India. It enjoys a sugar production capacity of 80,000 TCD per day and operates 10 sugar mills across the country.

The company also produces useful by-products like ethanol, power from bagasse, and organic manure from sugar mill molasses.

Over the last five years, the business growth has been rangebound. Between 2019-23, the revenue and profit has grown at a 5-year CAGR of 1.6% and 4.2%. The 5-year average RoE and RoCE stand at 15.8% and 20%, respectively.

The company does have some debt owing to borrowings for funding the capacity enhancements in the past.

In fiscal 2023, the company reported a debt-to-equity ratio of 0.6x, up from 0.4x in FY22. While these debt levels seem comfortable and allow for the business to finance further capacity enhancements, the interest coverage ratio of 9.4x does not inspire the same confidence.

However, given the current anticipated supply dearth, the business could perform well in the coming quarters, boosting the sugar major's financial health.

Balrampur Chini Mills aims to add another 2,000 TCD (which is about a 2% increase) to their sugar production capacity by 2025.

They're also eyeing growth in ethanol production and are eager to contribute to renewable energy projects.

The stock is trading at a PE multiple of 24.2x, a premium of 70% to its 5-year median PE of 14.2.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Bannari Amman Sugars

Fourth on the list is Bannari Amman Sugars.

The company boasts a sugar production capacity exceeding 23,700 TCD per day with 7 sugar mills across the nation.

Being a sugar manufacturer (contributes 77% to total revenues), the company also produces ethanol, generates power from bagasse and creates organic manure from molasses.

Over the past five years, Bannari Amman Sugars has shown impressive performance. Between 2019-23, the revenue has consistently grown at a rate of 11.5%, while profit has grown at a CAGR of 10.4%. This growth has resulted in a 5-year average RoCE and RoE, of 8% and 7.3%, respectively.

The company's strong performance in a cyclical commodity market shows the skillset of its management. Plus, their ability to keep borrowings low (debt to equity of 0.1x in fiscal 2023) is a real advantage as the industry grows.

The stock is trading at a PE multiple of 27.5x, a premium of 6% to its 5-year median PE of 25.9x.

To know more about the company, check out the its financial factsheet and the latest quarterly results.

#5 Uttam Sugar

Last on this list is Uttam Sugar.

It has a total sugar production capacity of over 23,700 TCD per day and operates 4 sugar mills across India. Apart from this, the company actively deals in all the by-products such as ethanol, bagasse-based power, and organic manure.

Uttam Sugar is well-managed with a strong track record of growth. Between 2019-23, the revenue and profits have grown substantially, reporting a 5-year CAGR of 10.5% and 48%, respectively. The 5-year average RoCE and RoE stand at 18.8% and 24.9%, respectively.

This consistent performance helped the company reduce its dependence on borrowings. The debt to equity has fallen from 3.1x in fiscal 2019 to 1x in fiscal 2023.

Going forward, the company is well-positioned to continue on this trajectory. Moreso, given the current lucrative opportunity and its strong financial position.

To add to the positive sentiment, it is enhancing its sugar production capacity by 26% to 29,950 TCDs.

Given the near-term supply crunch and the company's strong fundamentals, the stock has shot up in the past few weeks. It is available at a PE of 13.8x, a premium of 62% to its 5-year median PE of 8.5x.

To know more about the company, check out its financial factsheet and the latest quarterly results.

Conclusion

The anticipated supply crunch has caused sugar prices to rise sharply, which has benefited sugar producers.

However, the industry is also facing some challenges, such as rising production costs and competition from other sweeteners.

Despite these challenges, the long-term outlook for the sugar industry is positive. The global population is growing, and sugar is a staple food for many people.

In addition, majority of sugar players are diversifying into other products, such as ethanol and bio-fuels.

Despite the positive odds, investors who are interested in the sugar industry should do their own research and carefully consider the risks and rewards before 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...