Sugar stocks, which were on a roll until last year are taking a hit. Record sugar production in India, is not only likely to drag profitability (several cases losses) of Indian companies lower, but is also likely to hit many big producing nations like Brazil.
According to reports, there maybe as many as nine mills in Brazil, which may not produce sugar, due to low prices.
In India, sugar companies had a pretty decent run in the last two years. However, 2018, promises to be bad, as high production of cane and sugar, means prices will be significantly lower.
The problem right now is that if sugar prices stay low as they are, we might see sugar mills, incurring losses, unless they are able to produce power and ethanol.
On Thursday, Sugar prices tumbled down by Rs 50 per quintal at the wholesale market in Delhi as supplies exceeded the demand due to record production.
Marketmen said, surplus stocks on non-stop supplies from mills due to record production amid need base off-take by stockists and bulk consumers dragged the sweetener's prices down.
Even exports are unlikely to be offer a better option, due to restrictions. Even if restriction were to be removed, prices in the global market are even worse.
The worry right now for the markets are if all goes well and monsoon is good, we might see another round of record production. If that happens, there could be even more production. The problem is clear: there is less demand and more supply.
Sugar shares languish
Most sugar stocks have halved in value over the last one month or so. Dhampur Sugar, which was trading at Rs 330, has fallen to Rs 87. Balrampur Chini Mills, a stock that was trading at Rs 180, has dropped to Rs 64, Bajaj Hindustan from Rs 18 to Rs 7 and so on. A few south India based mills, have seen lesser damage to their share prices.
We believe that the downside risks to sugar stocks is likely to remain for some more time.
Those who are looking to invest from even a long-term should avoid. The surplus supply is likely to remain for some more time.