Firm domestic prices and improvement in realisations to drive performance of sugar companies Sugar prices increased sharply in January 2025 to Rs.39,000-39,500 per tonne, compared to around Rs.38,000 per tonne in the December 2024 quarter, which will boost the margins and profitability of sugar companies in the March 2025 quarter and the first half of 2025-26
A drop in realisations in the sugar segment and subdued growth in the ethanol segment are dragging the performance of sugar companies in the ongoing earnings season. The sugar prices fell by 3% year-on-year due to high sugar inventory in the December 2024 quarter. As the sugar companies focused on liquidating their inventory faster to meet canerelated dues, prices came under pressure, according to an Elara Capital sugar sector preview report for the December quarter. On the other hand, lack of ethanol price revision during the quarter impacted the ethanol segment’s realisations.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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The concerns are reflected in the share price performance of 23 sugar companies (with a market cap of more than Rs.100 crore) in the past three months. Nearly 22 of the 23 companies delivered negative returns, with 16 stocks falling by more than 15%. Moreover, 21 stocks underperformed the Nifty 500 index during the period. The returns are based on 6 February 2025 closing values.
The performance of sugar companies is expected to improve significantly from the March 2025 quarter, aided by a jump in sugar prices. Sugar prices increased sharply in January 2025 to Rs.39,000-39,500 per tonne, compared to around Rs.38,000 per tonne in the December 2024 quarter, which will boost the margins and profitability of sugar companies in the March 2025 quarter and the first half of 2025-26. Furthermore, a report from DAM Capital expects the prices to strengthen after the crushing season that concludes in March-April 2025.
The expected decline in sugar production is providing support to the prices. The industry body, National Federation of Cooperative Sugar Factories (NFCSF), and reports from rating agencies, India Ratings and ICRA, expect the net sugar production (after diversion towards ethanol) to fall to around 27 MMT (million metric tonnes) in the sugar season 2024-25 or SS25 (October 2024 to September 2025). The diversion of sugar towards ethanol production is expected at 4 MMT. In the past year, the net sugar production was at 31.8 MMT. On the other hand, domestic consumption is expected to be 28-29 MMT.
Lower sugarcane yields and recovery amid weather issues in Maharashtra and Karnataka, and red rot infestation in Uttar Pradesh are the key reasons for the likely decline in production. The sugarcane recovery rate is the percentage of sugar extracted from raw sugarcane.
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The lower cane availability and subsequently lower recovery rates are increasing the cost of production for sugar companies and costs may further go up if the UP government hikes SAP for SS25. However, experts believe that rising domestic prices will offset such an increase in costs.
“A hike of Rs.15-20 per quintal in SAP of cane for SS25 could increase the sugar production cost by around Rs.1.5 per kg and may affect the profitability of sugar mills, but the impact will be spread over 2024-25 and 2025-26,” states the India Ratings report. However, the rating agency believes that a likely uptick in sugar prices would limit the impact of an increase in the cost in 2025-26.
Export quota to benefit
In addition to supply constraints, the government approval for 1 MMT of sugar exports will provide further support to the domestic prices by offloading excess sugar to international markets, which will reduce the excess inventory. It will also help improve cash flows of companies by managing their logistic challenges by swapping their export quotas for domestic quotas. The exports will also help companies generate favourable realisations due to the depreciation of the rupee and the recent surge in international raw sugar prices, according to a recent Centrum Broking report.Ethanol price disappoints
While the government has lifted restrictions on the production of ethanol from sugarcane juice, B-heavy and C-heavy molasses for SS 2025, experts say that the recent price revision is unsatisfactory. Only the price of C-heavy molassesbased ethanol has been raised, whereas the prices of B-heavy molasses and sugarcane juice-based ethanol remain unchanged.The Systematix report states that companies that have substantially expanded their distillery capacities in the last few years primarily for B-heavy and sugarcane juice now run the risk of operating at lower utilisation levels. It expects distilleries to shift towards C-heavy molasses amid better margins in the segment. Let us look at three sugar stocks that are favoured by analysts and are currently offering a decent one-year upside potential.
Dwarikesh Sugar
It reported a steady performance in the December 2024 quarter supported mostly by the distillery segment. The overall revenue growth was flat on a year-on-year basis, with the sugar segment revenue declining by 3.1%. On the other hand, the distillery segment reported a 7.8% y-o-y growth. Analysts believe that lower cane yields will keep its margins under pressure in sugar season 2024-25 (SS25). However, the performance will gain momentum in SS26.
A recent Systematix report lists higher crushing figures and a diverse varietal mix, extensive crop protection measures, stable distillery operations (using cane juice/syrup as feedstock) and inexpensive valuations as key strongholds for the company.
Triveni Engineering and Industries
The integrated sugar company reported subdued performance in the December 2024 quarter with a 3% y-o-y decline in net revenue growth. While distillery and gear segment revenues reported growth, sugar and water segments saw a y-o-y de-growth. Low recoveries and higher cost of production hurt the sugar segment’s profitability, whereas lower ethanol production due to feedstock shortage hit the distillery segment. Experts are optimistic about performance improvement. Brokerage reports from DAM Capital and Systematix released after the December quarter results list an increase in sugar prices, full distillery capacity utilisation, an expected cool-off in grain prices and strong order books in engineering and gear segments as key earnings growth drivers.Balrampur Chini Mills
It reported a 3.1% decline in the consolidated revenue from operations in the December 2024 quarter. The sugar segment revenue reported a growth of 9.4%, whereas the distillery segment revenue registered a 15.6% y-o-y decline. Its focus on transitioning to healthier cane varieties is expected to create better yields in SS2024-25. Also, the upcoming polylactic acid (PLA) project, rising sugar prices, lifting of restrictions on the diversion of juice/B-heavy feedstock to produce ethanol, and the announcement of export quota are expected to improve operational performance in the future.Current price as on 4 February 2025. Nifty 50 12-M forward PE: 19.8 times. Source: Refinitiv
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This story originally appeared on: India Times - Author:Faqs of Insurances
