Sugar stocks are moving towards their five year low. An opportunity for long term investors

Business

oi-Shoaib

By Shoaib Zaman

Published: Thursday, September 22, 2011, 12:37 [IST]

The sugar stocks have turned bitter as many investors are getting out of the stocks. Most of these stocks are trading near there two year low and some are even marching further south towards the lows these stocks had seen in the last five years.

Common reasons that are attributed are high inventory levels as production is around 4-year high. According to a newspaper report in Business-Standard, 'sugar inventory is up 17%, the government said in reply to a question in the Lok Sabha recently'.

In response to high inventory the companies are asking for higher export limit, to which the government has agreed. But the stock prices are still falling.

The reason

It was initially expected that Brazil have a lower output. But recent data contradicts the earlier assumption as the country, Brazil, that supplies half the world's sugar output will be better this year too has dampened the investor sentiment.

On the other hand, the ships lined up at its port were waiting to load only 1.12 million ton of sugar, half of what was required a year ago. A year ago their requirement was only 2.81 million ton. This shows high inventory in most of the countries.

Closer at home, there is protests by farmers in Maharashtra, to increase the price of cane. This will affect the margins of the companies.

Though it is unlikely the stocks will reverse course anytime soon, but for long-term investors this maybe a good time to start following the sector closely. For discipline, investors can open a small trade in the stock, something that can force them to check and follow the story of the sector.

There are two important factors that need to be watched. Considering high oil prices, if government incentivise ethanol production, then bumper harvesting will not affect the companies much.

Second would be to see how much of land is used by farmers to plant sugar in the upcoming season. In India sugarcane is planted thrice a year in October, February-March and July. If less area is under cultivation then sugar prices will once again go through the roof in approximately 1-2 years.

Some of the important stocks to keep track of in the sugar industry will be Bajaj Hindusthan and Balrampuir Chini Mills. Shree Renuka Sugars is also an important stock in the sector but it is still trading at a high premium.

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