Sugar stocks soar on production cuts, brokerage initiates coverage with ‘buy’ rating
Sugar stocks in India soared on September 14, 2023, after officials cut Maharashtra state’s sugar output forecast by 14% for the 2023/24 crop year to the lowest in four years. The decline in production is due to a dry August month, which has impacted sugarcane yields.
Major sugar stocks, including Balrampur Chini Mills, Dalmia Bharat Sugar, Triveni Engineering and Dwarikesh Sugar, jumped as much as 12% following the news report.
DAM Capital Initiates Coverage on Sugar Stocks with ‘Buy’ Rating
In a research note, brokerage firm DAM Capital initiated coverage on sugar stocks with a “buy” rating on all four. The brokerage projected strong growth for the sugar companies on the back of expected higher prices. DAM Capital believes that sugar prices could rise to Rs37 per kg in the domestic market in the next 12 months.
Reasons for the Bullishness
The brokerage firm cited the following reasons for its bullishness on sugar stocks:
- Declining production: Maharashtra state accounts for more than one-third of India’s sugar output, and could produce only 9 million metric tons in the 2023/24 season, down from 10.5 million tons in 2022/23. This could result in rising sugar prices both in global as well as domestic markets.
- El Nino: DAM Capital said that fast-developing El Nino conditions are expected to further affect sugar production in key sugar-growing states and keep domestic sugar prices above Rs37 per kg. “This would benefit Uttar Pradesh-based sugar companies with higher sustainable sugar volume and higher sugar realization,” the brokerage stated.
- Ethanol blending: The government has been increasing the blending of ethanol with petrol in India. In the last five years, the blending rate has increased from 1.5% in 2018 to 11.5% in 2023. The government aims to increase the blending rate to 20% by 2025-26. This would require additional sugar, which could support sugar prices.
- Valuations: DAM Capital believes that sugar stocks are currently undervalued. The brokerage has a target price of Rs40 per share for Balrampur Chini Mills, Rs38 per share for Dalmia Bharat Sugar, Rs35 per share for Triveni Engineering and Rs33 per share for Dwarikesh Sugar.
Sugar Stocks in Focus
- Balrampur Chini was trading 6% higher at 12:32 pm.
- Dalmia Bharat Sugar was up 12%.
- Triveni Engineering was trading 7.5% higher.
- Dwarikesh Sugar traded 11% higher.
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