​​Sugar Stocks Down as Sensex Falls

29 Oct, 2021

7 min read

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Sugar stocks are indicative of important trends in the market. They are also an important cog in the industries sector of the economy. Read on to know more about its story.

Introduction

It is important for traders to keep tabs on the stock market on a frequent basis such that they can identify trends and recognize when a certain stock or industry is likely to be impacted for the better or for the worse. By being able to time the market, it is possible to make trading decisions that could accrue potential profits. That being said, being able to time the market is no easy feat and requires experience, dedication and even luck.

Set against this backdrop, sugar stocks witnessed a dip as the Sensex fell in the last week of September. This article seeks to examine the same.

Performance of Players within the Indian Sugar Landscape

When examining the stock of varied sugar companies, there were only four clear companies that experienced a rise in their value. These included Triveni Engineering & Industries that witnessed a hike of 1.92 per cent. This was followed by Simbhaoli Sugars which had a 1.77 per cent rise while Dalmia Bharat Sugar & Industries rose by 0.36 per cent. Sakthi Sugars witnessed a 0.34 per cent hike thereby allowing it to stand among other gainers.

On the flip side, Shree Renuka Sugars fell by 2.72 per cent. Dhampur Sugar Mills followed in its footsteps and witnessed a 2.36 per cent Dip. Rana Sugars, Mawana Sugars and KCP Sugar & Industries followed with 2.23 per cent, 1.86 per cent and 1.86 per cent dips respectively. Bannari Amman Sugars fell by 1.50 per cent, Ponni Sugars slipped by 1.37 per cent, EID Parry fell by 1.25 per cent and Rajshree Sugars & Chemicals dipped by 1.15 per cent.

The National Stock Exchange’s Nifty50 index witnessed a slip of 106.5 points arriving at 17748.6 while the 30-share Bombay Stock Exchange Sensex slipped by 410.28 points arriving at 59667.6.

Understanding the Dip in Sugar Stocks

While several sugar stock rates have appreciated in value majorly in 2021 alone and retail investors have gleefully flocked to the sweet, investing in the same requires an understanding of the industry.

The aforementioned dips in the stock of several sugar companies are owed to the cyclical nature of the sugar industry. This industry’s revenues are dependent upon sugar prices which are reflective of and tethered to the production of sugar along with its supply. During instances of almost stable demand, any fluctuations within the production or supply of sugar can cause its prices to rise and fall. This is most apparent in case of crop failures in Brazil which is recognized as the world largest producer of sugar. Such scenarios cause sharp hikes in the price of sugar. The sugar industry performs well in instances of prices rising. However, higher prices mean that farmers are motivated to grow more cane.  Owing to the fact that Indian farmers are secured under Minimum Support Prices or MSP, there isn’t much risk associated with increasing the sugar grown. As incentivized farming gains credence, supply of sugar increases which causes its prices to plunge. This cycle then continues to repeat itself.

August saw the price of sugar rise within global markets owing to worries pertaining to supply shortages from Brazil. This was due to their sugar crop having been adversely impacted by frost. Sugar companies were expected to perform well immediately after. Now, however that time has passed and while sugar stocks are capable of accruing handsome returns in the short term, they must not be confused to be generators of wealth. Take for instance the aforementioned Dalmia Bharat which was worth INR 200 in January 2010 and valued at INR 120 in January 2020. Else look at Shree Renuka Sugars whose value lay at INR 100 in January 2010 and was INR 10 in January 2020. These 10-year return frames are most telling. They are not wealth creators and certainly don’t serve as consistent compounders.

Conclusion

Rather than hedging all of one’s bets on stocks pertaining to the sugar industry, it is recommended that investors consider investing in companies that have been consistently able to generate wealth over long time frames. In contrast to the lacklustre performance of sugar stocks in the period between 2010 and 2020, stocks belonging to companies like Asian Paints, Pidilite, HCL Technologies and HUL performed well. They allowed investors to enjoy the merits associated with multibaggers as they generated wealth.

Frequently Asked Questions

Q1. Do sugar stocks make for viable long-term investments that allow for wealth creation over the long term?
A1. Sugar stocks have a history of being better suited to short-term investments as they allow their shareholders to benefit from short term returns. Across longer time frames, however, sugar stocks aren’t likely to allow for wealth creation as the industry is cyclical.

Q2. What is a defining characteristic of the sugar industry?
A2. A defining characteristic of the sugar industry is its cyclical nature. This industry’s revenues are dependent upon sugar prices which are reflective of and tethered to the production of sugar along with its supply.

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