RUN-UP TO THE BUDGET: AGRI-BUSINESS. Sugar stocks turn sweet after 5-year hiatus

Even as the Sensex and Nifty saw a sharp 16 per cent slide in the past six months, sugar stocks have been doing well. The stocks of most sugar makers have made healthy gains of 15 to 75 per cent. Among the large players, Oudh Sugar Mills gained 95 per cent, followed by Balrampur Chini Mills that gained about 74 per cent.

The stocks of a few lesser-known sugar mills, such as Dwarikesh Sugar Industries, delivered multi-fold returns during the period. Bajaj Hindustan was an exception — the stock declined 3 per cent over the past six months.

So what made sugar stocks turn sweet after a five-year hiatus?

One, a sharp recovery in domestic sugar prices came in as a big sentiment booster. The spot price of sugar in the NCDEX has jumped from about ₹24 a kg in August 2015 to about ₹32 currently, clocking 33 per cent gains.

A weak monsoon in 2015 for the second consecutive year and the expectation of a drop in sugarcane harvest and sugar production aided the price increase.

Two, a recovery in sugar price in the global market and the weakness of the rupee against the US dollar have helped boost sentiment on the export front.

From around 11.5 cents a pound, the price of sugar in the global market rose to over 15 cents by December 2015, before falling to around 12.7 cents now.

Though prices have softened in the past month, a weakening rupee against the dollar should provide some cushion to the mills.

The Centre has set an export target of 3.2 million tonnes for 2015-16. Domestic mills have contracted to export 1 million tonnes and have shipped about 0.85 million tonnes. Higher realisation in the home market and higher exports have had a positive rub-off on the profitability of sugar mills. The performance of 40 Indian sugar mills over the past nine months supports this.

The aggregate revenue of these mills has risen 2 per cent during the nine-month period ended December 2015, compared with the same period last year.

The aggregate operating profit margin for these companies improved to 3.5 per cent from 2.6 per cent, while the net loss narrowed by about 14 per cent. Besides better operating performance, rate cuts by the Reserve Bank of India also helped mills save on the interest outgo, providing a leg-up to profits.

Looking ahead, the expectation of a lower sugar output in 2016 should continue to support domestic prices.

Also, higher exports to meet the Centre’s target should help the ailing industry wipe off some losses.