Sugar shares buying and selling weak on subsidy squeeze could also be an anomaly

Sugar shares retreated on Friday after the central authorities minimize subsidy on sugar exports. The mixed market capitalisation (m-cap) of the nation’s high 15 sugar producers was down 2.8 per cent on common on Friday. As compared, the benchmark BSE Sensex closed the day with features of practically 2 per cent to reclaim the 50,000-level.

Friday’s fall in sugar was, nevertheless, an aberration. The sector has been an outperformer as a consequence of a mix of upper sugar costs and low uncooked materials (sugarcane) costs.

The Uttar Pradesh (UP) authorities – the nation’s largest sugar-producing state – has not raised cane costs for 4 years. There was a gradual rise within the margins and profitability of listed sugar corporations – a majority of them having factories in UP.

The mixed m-cap of those high sugar producers has jumped greater than 3x since March 2020, in opposition to 72 per cent rally within the benchmark BSE Sensex through the interval.

The sugar corporations within the Enterprise Customary pattern closed Friday with a mixed m-cap of Rs 31,600 crore, in opposition to Rs 10,000 crore on the finish of March final yr.

ALSO READ: Sugar might be exported sans subsidy solely underneath tighter world mkts: trade

Analysts anticipate the sugar rally to renew after a short hiatus, because the minimize in export subsidy can have no materials impression on the sugar corporations’ realisations – worth that they get for each kilogram (kg) of sugar offered – or their margins.

“A subsidy minimize of 32 per cent on sugar exports isn’t anticipated to impression export realisations, as greater world sugar costs and a weaker rupee are anticipated to offset the discount in subsidy. Through the interval October 2020-April 2021, world white sugar costs have risen sharply by 18 per cent and the Indian rupee weakened by 1.5 per cent on-year,” says Hetal Gandhi, director, CRISIL Analysis.

CRISIL says world costs will proceed to stay on the present ranges until the top of the season – at round $425-427 per tonne as much as September 2021. The federal government has a margin to chop export subsidies additional by 17-18 per cent with out having any impact on export realisations for sugar exporters.

In accordance with CRISIL’s calculations, within the present crushing season, export subsidy accounted for round 10 per cent (Rs 4/kg) of the entire export realisations of sugar producers (Rs 35/kg).

Within the first three quarters of FY21 (or 9MFY21), the trade reported core working margin (excluding different earnings) of seven.1 per cent, up from 6.1 per cent in 9MFY20 and simply 0.7 per cent in 9MFY19.

The trade web gross sales had been up 17.8 per cent year-on-year (YoY) throughout April-December 2020. The double-digit income progress for the trade got here in opposition to the background of a income contraction for the remainder of the manufacturing sector as a result of first wave of Covid-19 lockdowns in 2020.

In the identical interval, the core working revenue from operations was up 37 per cent. The headline web revenue was, nevertheless, down 50 per cent YoY as a consequence of decrease different earnings.

Shree Renuka Sugars – the nation’s high sugar maker by income – had reported distinctive features of Rs 3,059 crore in Q2FY20, boosting the trade’s headline earnings in FY20.

Increased realisations and margins have resulted in a gradual rise within the trade’s web gross sales and earnings on a trailing 12-month foundation, making it one of many high performing sectors on the bourses.

Consultants consider a mix of low cane costs and rising worldwide costs has created a beneficial atmosphere for the Indian sugar trade.

“In Could 2021 (as much as Could 19), worldwide sugar costs touched a four-year excessive as white sugar costs in London and uncooked sugar costs in New York averaged at $461.8 per tonne and US cent 17.4 per pound, respectively. Such excessive worth ranges for each these varieties had been witnessed earlier 4 years again within the preliminary months of 2017,” wrote Madan Sabnavis, chief economist, CARE Scores.

This present tailwind for sugar shares is predicted to final for some time, as most commodity costs are on an upward trajectory and anticipated to stay agency, given the worldwide inflationary expectations.

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