Sugar stocks turn sour, Sharekhan cuts target prices - here’s why

Sugar stocks like Balrampur Chini, Praj Industries, Dhampur Sugar and Dwarikesh Sugar have been seen massive decline between 15-20% in the past week, following government’s instruction to sugar mills not to utilize sugarcane juice and syrup for ethanol production in the upcoming 2023-24 season.

The shares of Balrampur Chini were down 1.89% to ₹389.50 per share on Tuesday, December 12, meanwhile, Praj Industries closed at ₹545.95 apiece, Dhampur Sugar shares were trading 0.53% lower and Dwarikesh Sugar shares ended at ₹86.50 per share.

"Restrictions on the use of sugar juice for ethanol production stems primarily from the concerns regarding sugar crops this year in Maharashtra and Karnataka which experienced uneven rains. Since sugar price can be a sensitive issue during election time, it would be unrealistic to expect any relaxation in this measure till the elections are over. This is certainly a negative from the perspective of sugar companies which have invested heavily in producing ethanol. The sugar stocks, particularly the ethanol-oriented ones, are likely to remain under pressure for some time,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The provision of Ethanol sourced from prevailing proposals received by Oil Marketing Companies originating from B-Heavy Molasses will persist. In contrast to the other entities, Praj Industries specializes in supplying technology for ethanol production rather than being a sugar producer.

Also read: When govt pours cold water on sugar mills' ethanol dreams

Brokerage firm Sharekhan, in its report, highlighted the potential impact on the company's FY2025 earnings if the government's move to restrict the diversion of sugar for ethanol production is not reversed within the next six months. The domestic brokerage further revised its targets on sugar companies under its coverage universe.

Sharekhan has revised its price targets downward by varying percentages (ranging from 4% to 16%) for Triveni Engineering & Industries, Balrampur Chini, Dhampur Sugar Mills, and Dhampur Bio Organics.

"We have assumed reduction in the ethanol production and sales considering the quantum of ethanol produced through sugar syrup/juice. On the other hand, we have also considered the increase in sugar sales volume considering the likely increase in the sugar production on diversion of cane for ethanol manufacturing," Sharekhan report said.

According to sources within the industry, the report suggests that this is perceived as a provisional measure, expected to be overturned once there is an accumulation of sugar inventory in the upcoming month.

The government's action is perceived as a strategic measure to guarantee a sufficient sugar supply within the country and prevent an uncontrollable surge in prices.

According to industry projections, sugar production for the sugar year 2023-24 is anticipated to be in the range of 30-30.5 million tonnes, while domestic consumption is expected to be around 28-29 million tonnes.

Although the recent decline in sugar stock prices has stabilized in the past few trading sessions, these stocks experienced a sharp downturn last week. Triveni Engineering witnessed a decrease of over 14%, while Balrampur Chini Mills plunged by 16% during this period. Dhampur Sugar shares also saw a 12% drop in four sessions, and Dhampur Bio Organics corrected by over 10%.

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