Stocks To Buy: Systematix Assigns ‘Buy’ To Four Sugar Stocks Including Dwarikesh Sugar, Sees Upto 26% Upside

Systematix Research Report

Stocks to Buy: We remain positive on the sector, reiterating Buy on Balrampur Chini Mills Ltd., Triveni Engineering and Industries Ltd., Dwarikesh Sugar Industries Ltd. and Praj Industries Ltd., with Balrampur Chini as our top pick.

Sugar companies posted a weak Q2 FY25, with revenue/Ebitda/PAT falling 3%/44%/27%, respectively. We attribute the disappointing Q2 performance to the industry facing challenges from-

1. government arbitrarily banning the use of juice/B-Heavy molasses to produce ethanol, which restricted the availability of feedstock, resulting in lower ethanol production,

2. higher raw material (sugarcane and maize prices) and off-season expenses,

3. lower cane availability, given the higher incidence of red rot and weak monsoon in 2023 and

4. nil cane crushing resulting in lower absorption of fixed costs. Profitability in the distillery segment took a beating (down 79% YoY), as volumes plummeted 28% YoY and lower plant utilisation impacted margins due to changes in the feedstock mix.

A 2%/4% YoY improvement in sugar/ethanol realisation, respectively, was the only bright spot for an otherwise glum quarter. Sugar realisations were buoyant at more than Rs 38.5/kg due to lower quota allocation. The new sugar season 2024-25 spells better times for the sector, on the back of-

1. better cane availability on good monsoons,

2. higher feedstock (juice/B-Heavy molasses) availability to produce ethanol, as more cane would be crushed,

3. government permitting the use of any feedstock (juice, B-Heavy molasses, rice, etc.) to produce ethanol,

4. likely 4-6% increase in ethanol prices,

5. likely Rs 3-4/kg increase in sugar minimum support price, whereby sugar prices may stay firmly above Rs39/kg, and,

6. possibility of sugar being exported in Jan-Feb 2025 owing to likely remunerative international prices and higher domestic surplus.

In its first advance estimate for SS-2024-25, ISMA has pegged India's gross sugar production at 33.3 million tonnes and closing stock at 8.78 mn mt leaving room for at least 1.5-2 mn mt of exports. Therefore, for the upcoming SS2024-25, we envisage healthy improvement in millers’ operating performance.

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