Sugar stocks fetched sweet returns last year. Charts tell a different tale now

Record production, surging exports and the ethanol story is working wonders of Indian sugar companies. But can the past returns sustain despite an ongoing correction?

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The great Indian sugar story is likely to get sweeter this year with the government estimating 410 lakh tonnes (LT) of production, surpassing last year’s record output of 394 LT, but sugar stocks may taste a bit sour this time, it seems.

In the sugar season of October to September 2021-22, a record 5,000 lakh tonnes (LT) of sugarcane were produced in the country. About 3,574 LT of sugarcane was crushed by mills to produce 394 LT of sugar.

The huge production led the government to declare that India was the world’s largest producer and consumer of sugar.

Also Read: India’s October-December sugar output up 3.69% at 120.7 lakh tons: ISMA

Sugar exports too are rising in sync. The industry shipped close to 110 LT in the last season, higher by 57 percent year-on-year. The government has allowed 60 LT till 31st May for the ongoing season, which will be increased in all likelihood.

The cherry on the cake has been the ethanol story. The 20-percent ethanol-blended fuel will be available at select outlets from this month and to meet the massive target, sugar firms have set out to expand their capacities rapidly.

Such macro fundamentals have sweetened trades with sugar stocks sustaining a rally through the last two years. Shree Renuka, Dalmia Bharat Sugar, Balrampur Chini and Triveni Engineering have given 100-200 percent returns. But the good news probably ends here.

Are sugar stocks overbought?

Technical experts believe that the stocks are now consolidating in a sideways trajectory. After giving rich returns in the October-December quarter, correction looks in the offing.

“Sugar stocks appear to have reverted from an overbought zone after a very strong quarter. They might continue to trade sideways to bearish in the short term as the correction does not appear to be complete at the current juncture,” technical analyst Dinesh Nagpal told Moneycontrol.

“The charts are not showing triggers for a further rally from a technical perspective,” Milan Vaishnav, founder of Gemstone Equity Research, said.

Most sugar stocks are trading in a similar technical setup above the 50-DMA and 100-DMA levels but below 200 DMA. Balrampur Chini Mills is the only exception that’s trading above all the moving averages, he pointed out.

DMA, or the day moving average, is a widely tracked technical indicator that helps traders predict a trend.

Also Read: Thanks to monsoon, sugar sector finds itself in a sweet spot

“On the charts, Balrampur Chini Mills has formed triangle kind of formation near 200 DMA. Post that formation, traders are waiting for either side to break out,” Amol Athawale, Deputy VP of Technical Research at Kotak Securities, said.

For the bulls, 410 would be the important breakout for a rally towards Rs 430-440. On the flip side, trading below Rs 375 may increase further weakness up to 50-DMA or Rs 365-360. The stock closed on January 5 at Rs 389.

“Balrampur Chini is currently in a long-term range of Rs 300-410. A monthly close above Rs 410 should pave the way for Rs 520-595 in the long term,” believes Tips2Trade’s AR Ramachandran, a Sebi-registered analyst.

Dalmia Bharat Sugar, on the other hand, gave a stellar return of 166 percent in 2021 only to be muted in 2022. The stock touched a multi-month high of Rs 418 in December and quickly witnessed profit-booking.

“On December 28, the stock corrected and is trading near 200-day SMA and the texture of the chart indicates further weakness is possible,” said Athawale.

If the stock continues to trade below Rs 392, the correction wave could go on till it slips below 50 DMA or Rs 360-355, believe experts.

Another stock which is in the overbought zone on the monthly charts is EID Parry. “Investors can hold but with a strict stop-loss of Rs 545. A monthly close below Rs 545 should be used to exit all buy positions as a fall till Rs 388 support could be possible,” Ramachandran said.

Shree Renuka Sugar, which has the highest market capitalisation in the sector, sees a negative divergence on the monthly chart. “Investors are advised to keep booking profits at these higher levels,” Ramachandran said. Negative divergence happens when the share price is in an uptrend but RSI (relative strength index) is moving lower.

Stocks that stand out

According to Nagpal, two stocks from the sector stand out as likely outperformers once the correction comes to an end. These Bajaj Hindusthan and Simbhaoli Sugars. Both gave almost 150 percent return in 2021. But 2022 was rather sombre with only 13 percent and 38 percent gains.

“Bajaj Hindusthan completed its long-term correction and reversed from its monthly Ichimoku support, it is now into its short-term pullback. It could be accumulated between Rs 17 and Rs 13 with a stop-loss at Rs 10 for targets of Rs 28 and Rs 40,” said Nagpal.

Simbhaoli Sugars could be accumulated at Rs 27-22 with a stop-loss at Rs 18 for targets of Rs 45 and Rs 70, he added. The stock is currently trading near Rs 26 on the NSE.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.?