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Up to 900% return in just three years! Can you spot multibaggers from this transforming sector?

Up to 900% return in just three years! Can you spot multibaggers from this transforming sector?

The sector is in the sweet spot due to structural changes, thanks to various government initiatives which ensure the financial position of the companies remains healthy. 

Historically, the domestic sugar industry has been plagued by two major issues – natural cyclicality (irregular monsoons) and induced cyclicality (leading to cane arrears). Historically, the domestic sugar industry has been plagued by two major issues – natural cyclicality (irregular monsoons) and induced cyclicality (leading to cane arrears).

Not even a single stock from this sector eroded investors’ wealth in the past three years. In fact, as many as 20 stocks rallied more than 100 per cent during June 2019-June 2022 and a dozen of stocks jumped in double-digit during the same period. Can you guess the industry?

At present, the sector is in the sweet spot due to structural changes, thanks to various government initiatives which ensure the financial position of the companies remains healthy. This is the sugar sector. 

Historically, the domestic sugar industry has been plagued by two major issues – natural cyclicality (irregular monsoons) and induced cyclicality (leading to cane arrears). However, after various government measures to support the sector, market watchers believe that there has been a structural change in the industry dynamics. As a result, shares from these sectors have done extremely well during the past few years.

Performance of sugar stocks

With a rally of 897 per cent, Rana Sugars emerged as the top gainer in the list. Shares of the company have jumped to Rs 31 on June 2, 2022 from Rs 3.11 on June 3, 2019. It was followed by Sir Shadi Lal Enterprises (up 483 per cent), Shree Renuka Sugars (up 416 per cent), Parvati Sweeteners and Power (up 375 per cent) and MPDL (up 302.25 per cent). 

Among other major sugar companies, Dwarikesh Sugar Industries, Triveni Engineering & Industries, Dalmia Bharat Sugar And Industries, EID Parry (India), Balrampur Chini Mills, Mawana Sugars, DCM Shriram Industries and Uttam Sugar Mills have gained between 130 per cent and 300 per cent during the same period. On the other hand, the benchmark BSE Sensex advanced nearly 39 per cent during the same period.

Graphic: Mohsin Shaikh
Graphic: Mohsin Shaikh

Commenting on the major shift in the sugar sector, Vijay S Banka, managing director, Dwarikesh Sugar Industries told Business Today that the domestic sugar industry used to be cyclical. They used to have two years of surplus, two years of deficit, and one normal year. Because of the successive increase in cane prices and the introduction of new and better varieties, farmers have been able to increase the yield. So, India is now a structurally surplus sugar producer. This is the big change that has happened. 

“To address the surplus, the government is trying to address this by encouraging exports. India has done phenomenally well in the export market in the last few years. Big changes also happened with the ethanol blending program. So, India and the sugar industry are no longer cyclic,” he added.

Volatility in crude prices, environmental hazards from fossil fuels consumption (ethanol blending helps reduce the emission of greenhouse gases) and energy security concerns (India imports 80-85 per cent of its petroleum product requirements) have resulted in the Ethanol Blending Programme (EBP) being implemented by the government of India. 

According to Centrum Broking, the demand for ethanol blending is estimated to reach 1,016 crore litre from the current 425 crore litre (ethanol blending was 172/332 crore litres in SSY20/21) over ESY21-26, clocking a CAGR of 25.1 per cent. This is primarily driven by the sugar industry and has resulted in an expansion in the total addressable market for integrated sugar mill owners from Rs 0.95 trillion to Rs 1.4 trillion over FY21-24.

What’s next?

Centrum Broking believes that the increase in the addressable market size would be beneficial for players that have embarked on aggressive distillery capacity expansion plans to cater for the growing fuel-ethanol demand. The brokerage is positive on Balrampur Chini Mills and Triveni Engineering & Industries with a target price of Rs 515 and Rs 313, respectively.

Sharekhan is positive on Dhampur Sugar Mills with a target price of Rs 315. "Ethanol capacity will be expanded to 500 KLPD of B-heavy molasses and 380 KLPD of C-heavy molasses from 250 KLPD currently; ethanol production is expected to increase to 12 crore litre in the ethanol year 2022-2023 from 8 crore litres," it said.

“With positive structural developments, newer capacities lending revenue visibility or stability, robust capex cycle behind and inflation resistant nature of the industry we believe that the industry is in the sweet spot, and hence we are bullish on the sector,” Centrum Broking said in a report.

Also read: These popular multibaggers of 2021 are down up to 50% in 2022; time to grab the opportunity?