Sugar stocks which had been on a role in 2017, have been badly hit this year. Most of the stocks have halved, while some have even sunk to one-third in value.
Dhampur Sugar Mills for example, which had hit a 52-week high of Rs 210 has dropped to Rs 90. Balrampur Chini Mills one of the bigger players has now dropped to Rs 68, from Rs 180. Similar is the story of players like Mawana Sugars, Bajaj Hindustan and others.
Prices dropping as production hits high
The problem right now for sugar companies is that prices of sugar are dropping rapidly. Sugar production has peaked, while demand has not been able to keep pace with rising production.
Sugar prices have thus come crashing down, even as sugar cane costs have risen, thus squeezing margins of sugar companies. To compound worries, global prices have fallen even faster and even exports if was an option, prices are worse around the globe.
If the government provides an extra quota for exporting sugar, even that would help very little.
Sugar mills have evolved
Over the last 2 decades or so, sugar mills have evolved a great deal. From mechanized methods, to diversification into ethyl alcohol and production of power, sugar mills have looked at all means to help improve profitability. However, the mainstay for these companies, continues to be sugar production. Unless sugar prices move higher, there is very little scope of profitability improving.
At least for the next few quarters, we are unlikely to see that happening. With the central government elections slated for next year, there is also unlikely to be too many policy changes. So, until then investors may to be a lot patient with sugar shares.