5 Reasons Why Sugar Stocks Could See A Solid Rally

Sugar companies are in a sweet spot and one could see a better performance by some of these companies in the next few quarters. Here are 5 reasons why sugar stocks could see a rally, according to a report from Motilal Oswal.

1. Shortfall in global sugar production

Brazil and Thailand, the two largest sugar exporters in the world, are expected to witness lower production of 7-8MMT each as compared to last year, given the challenges faced due to dry weather. This would result in higher opportunities for domestic exporters as the surplus inventory for the current season is expected to be 9.5MMT.

2. Leading to higher global sugar prices

Further the shortfall in global sugar production has resulted in sharp increase in global prices of sugar to > 16.5 cents/lb, which is likely to sustain. Also, if global sugar prices increase from 16.5-17.5cents/lb to 19-20/lb, then higher amount of sugar is expected to be utilized for conversion to ethanol, leading to further increase in global sugar prices.

3. Sugar prices saw spurt in Apr’21

During Dec-Mar’21, sugar prices were flat at Rs 31/kg. However, in Apr’21 the prices saw spurt to Rs 33-34/kg, reflecting higher demand due to summer season. Going forward, prices are expected to sustain at higher levels.

4. Push for higher Ethanol blending

In the current season, sugar players are committed to supply 3.5bn-litres of ethanol to OMCs players, post which, average Ethanol blending with fuel across India is expected increase to 8.3-8.5%. GoI plans to increase this blend rate to 20% across India by CY25, post which the demand for ethanol is expected to increase substantially. At 20% ethanol blended rate, demand for ethanol is expected to increase to 10bn-litres.

5. Positive Outlook:

As mentioned above, sugar industry is well poised to benefit from both global and domestic factors. Tight global demand-supply situation, favourable policies, push for higher ethanol blending in India and higher ethanol capacity addition will keep the inventory under control and prices firm.

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