Sugar stocks may lose sweetness as many are fully priced

Amid rally in mid- and small-cap stocks, sugar stocks have turned out to be multibaggers due to high sugar prices and better financial performance.

Stock prices of companies such as Upper Ganges Sugar & Industries, KM Sugar Mills, Dalmia Bharat Sugar & Industries, Dharani Sugars & Chemicals, Mawana Sugars, Simbhaoli Sugars, Oudh Sugar Mills, Uttam Sugar Mills, Parrys Sugar Industries, Rajshree Sugars & Chemicals and Ugar Sugar Works were locked in upper circuit of 5-20 per cent.

Sugar companies have witnessed a turnaround in their financial performance in the June 2016 quarter with 23 companies reporting combined net profit of ₹326 crore, compared to a net loss of ₹880 crore in the same quarter last year. But market watchers warn that the current market rally may fizzle out soon.

“There is no steam left in 90 per cent of sugar stocks. UP-based companies have rallied too much,” said G Chokkalingam, founder, Equinomics Research and Advisory.

Factors, such as the upcoming elections in Uttar Pradesh (hence, populist measures such as hike in cane prices) and pressure on government to control inflation (sugar is a main component) do not work in favour of the sugar sector.

Achal Lohade and Chandra Gopal Choudhary, analysts at JM Financial, downgraded the Balrampur Chini stock as they see the current upcycle’s nature and longevity to be relatively short. Government actions (stock limits, export duty, and withdrawal of excise duty benefit on ethanol) may cap the sugar price increase and there is likelihood of rise in sugarcane plantation on robust monsoon in Maharashtra / Karnataka. There is also uncertainty around the price of cane to be fixed by the UP Government.

Nevertheless, shares of companies such as KCP Sugar, Andhra Sugar and Dwarikesh Sugar are among the top picks.