MUMBAI: Sugar stocks — the star performers of 2009 — are now turning out to be a bitter pill for investors who bet their money on them. These shares have been falling for the past one month in line with declining international sugar prices, and analysts tracking the sector are asking clients to keep their portfolios ‘sugar-free’, expecting the downtrend to persist for some more time.
They cite lack of any strong trigger to reverse the falling trend in sugar prices, continuing government interference to check rising sugar prices and increased production estimates, as the negatives for the sector.
Frontline sugar stocks like Shree Renuka Sugar, Balrampur Chini and Bajaj Hindusthan have fallen over 30% from their peaks of 2010, while second-line shares like Rajshree Sugars, Sakthi Sugars and Dhampur Sugar are down between 38-47%.
International sugar prices have dived to 7-month lows due to deferment of purchases by importing nations.
“Internationally, sugar prices have fallen almost 20-25% in a short period, indicating unwinding of speculative positions,” says Rajan Malik, national head for the PCG, equity advisory, Anand Rathi Securities.
“Till some time back, there was a shortage (of sugar) globally. However, it is now felt that while the shortage will remain, it will not be to the extent anticipated earlier,” he said.
According to industry experts, the price of white sugar has fallen 6-18% to $529 per tonne and raw sugar price has dipped 11-12% to 19.6 cents per pound. Analysts are expecting a rebound in sugar production next year and a higher-than-anticipated output in the current agricultural year ending September.
This is making investors nervous. In India, production estimate for the year ending September has risen from 15.5 million tonnes to 17 million tonnes. This is expected to lead to a downward correction in local sugar prices.
“While there is still a gap between production and consumption, imports will make up for the difference in India,” says Mr Malik, and recommends selling sugar shares at every rise.
Traders are betting on a further fall in the prices of sugar shares. “All the four sugar stocks in the derivative space are witnessing a build-up of short positions,” says Monal Desai, VP & head-institutional equity derivatives, Prabhudas Lilladher.
Outstanding position in Balrampur Chini March futures is at 2.73 crore shares, in Bajaj Hindusthan it’s at 1.28 crore shares, in Shree Renuka Sugars it’s at 1.75 crore shares while in Triveni Engineering, the figure stands at 62.9 lakh shares. Open interest in these futures rose between 6-10% on Thursday.
There are some contrarians as well, who feel that it may not be prudent to sell sugar stocks at these levels.
“The correction in spot prices is having an impact on stock prices as well. We expect the deficiency in sugar to balance out over the next few months,” said Bhavesh Gandhi, sugar & hotels analyst, India Infoline.
“However, the stocks could see a temporary pullback, before the next round of decline sets in. So an investor should wait for the rally to trim their positions in these stocks,” he says.
Where Renuka & BALRAM will settle then? RENUKA Immediate support is @ 138 & next support @ 124, BALRAM - support @ 85 & 72 levels. One can expect some pull back @ these supports for sure.
Renuka below 100 (@97 & 74) is a sure buy for me in LT basis.
