U.P. Govt in the last week of February, allowed sugar mills to produce ethanol from sugarcane juice and syrup. Since then, practically all U.P. based sugar stocks seen hitting 52 week high. U.P. had produced 128 lakh tonnes of sugar in season 19-20 (October 19 to September 20) and likely to produce 123 lakh tonnes for current season 20-21. India sugar production for season 19-20 was at 274 lakh tonnes, which is estimated at 320 lakh tonne for season 20-21. This rise of 46 lakh tonee will be seen from Maharashtra, of 40 lah tonnes and by Karnataka of 9 lakh tonnes. UP will show a fall of about 5 lakh tonne sugar production, inspite of yield seen rising marginaaly for the current season.
Ethanol prices are fixed at Rs. 43.75 per litre for B Molasses, Rs. 54.27 from C Molasses and Rs. 62.85 from sugarcane juice. But this rate of Rs.62.85 per litre of ethanol may not be commercially viable for UP sugar mills, as it will give them an effective realisation of Rs. 30 per kg of sugar, while they want it to be minimum at Rs. 33 per kg., implying a lower realisation by 10%. On top of it, small capex has to be made for this process by mills. So, overall, not more than 20 lakh tonne of sugar will be diverted for production of ethanol, that too, via C molasses route, for which manufacturing set up is already there.
Hence, market is seen going overboard many times, and more especially when there is an irrational exuberance in mid and small cap stocks, for want of new ideas. Same mistake was made 8-9 months back on sugar stocks, on theme of Sanitizers, which has flopped miserably.
Due to strong rupee, sugar mills are seeing lower realisation from sugar exports, while higher opening inventory of 106 lakh tonne may not seee domestic price of sugar rising, which is already supported by MSP (minimum selling price), by the Govt. So, it is most likely that UP suagar stocks are seen picked out and may see profit booking and may correct by 15% in next couple of months.
This is neither a buy nor a sell recommendation, while such calls are provided exclusively to our paid members in the Member Zone.