Stocks To Buy: 2 Top Sugar Sector Stocks To Buy For Good Gains Of Upto 57%

Observations on India's sugar industry as made by ICICI Direct

Sugar sector has seen a fundamental change with the implementation of biofuel policy to bring ethanol
blending level to 20%.

The government supported the industry with floor price for sugar, monthly quota mechanism, buffer & export subsidy in past.

This led to reduction in sugar inventories in last four year ¤tly industry wide sugar inventories are at four-year low of 6.4 MT (expected in September 2022).

Ethanol blending reached 10% levels & with the further expected capacity addition in next two years, it would
reach 20% by 2025.

Given the crude prices are hovering above US$100/barrel, Brazil is diverting more & more sugarcane towards ethanol, keeping global sugar prices firm.

Considering, high sugar production in India, the country is still dependent on exports to the tune of 6-7 MT (in 2022-23 sugar season).

Margin for the sugar sector to inch higher

The brokerage stated, "increasing proportion of B-heavy &sugarcane juice ethanol would result in significant improvement in margins for sugar millers. Despite record sugar production of 36 million tonne (MT) in 2021-22 sugar season, sugar inventories are going to be at a four-year low of 6.4 MT by the end of September 2022 mainly on account of record exports of 10 MT during the season. This has kept sugar prices firm at around 35/kg. Moreover, increasing distillery capacities would result in more diversion towards ethanol, which, in turn, would improve margins of sugar millers and also help in keeping sugar prices firm above the cost of production".

Aggressive expansion in distillery capacity

As per the brokerage, "most companies in its coverage universe would be diverting approximately 10% of its sugarcane towards sugarcane juice ethanol & rest towards B-heavy ethanol (except mandatory levy requirement towards ENA). This would lead to considerable margin improvement in next two years. Moreover, sugar inventory levels would come down significantly resulting in lower working capital debt and, in turn, reduction in interest costs".

Sugar stocks post correction trade at 4-10x FY24 earnings; Dalmia Bharat and Dwarikesh Sugar listed as top picks

The brokerage highlighted that post the correction, sugar stocks trade at 4-10x FY24 earnings. And within its sugar stocks coverage universe, it is bullish on Dalmia Bharat owing to it being most aggressive when it comes to ethanol capacity expansion. Also, the firm is viewed to have sizable refined sugar capacity for exports.

The other stock liked by the brokerage from the space is Dwarikesh Sugar and the rationale for the same is "given it has abundant availability of sugarcane
in its catchment area & highest sugar recovery among UP sugar millers.

Disclaimer

Stock market investments are risky and pose risk of financial loss. The above two stocks from the sugar space are as given by the brokerage. Investors should do their own due diligence and consult professional advisors before taking any risky call.