What does the Cabinet's approval to increase FRP on sugarcane mean for sugar stocks? Analysts decode

Sugar stocks today: Sugar stocks such as Shree Renuka Sugars, Balrampur Chini, EID Parry, Magadh Sugar, Mawana Sugars, Avadh Sugar, Rajshree Sugars, and others were in focus on Thursday, February 22, as the Cabinet Committee on Economic Affairs chaired by Prime Minister Narendra Modi approved the increase in the fair and remunerative price (FRP) of sugarcane.

The fair and remunerative price is the minimum price that sugar mills must pay farmers. The FRP of sugarcane for sugar season 2024–25 is fixed at Rs 340/quintal at a sugar recovery rate of 10.25 per cent.

This is the historic price of sugarcane, which is about 8 per cent higher than the FRP of sugarcane for the current season (2023–24).

As per the press release by the Cabinet Committee on Economic Affairs (CCEA), the FRP of sugarcane for sugar season 2024–25 is fixed at Rs 340/quintal at a sugar recovery rate of 10.25 per cent. This is the historic price of sugarcane, which is about 8 per cent higher than the FRP of sugarcane for the current season (2023–24).

"With this approval, sugar mills will pay the FRP of sugarcane at Rs 340/quintal at a recovery rate of 10.25 per cent. With each increase in recovery of 0.1 per cent, farmers will get an additional price of Rs 3.32, while the same amount will be deducted from the reduction in recovery of 0.1 per cent. However, Rs 315.10/quintal is the minimum price of sugarcane, which is at a recovery rate of 9.5 per cent. Even if sugar recovery is lesser, farmers are assured of FRP at Rs 315.10 per quintal," the release read. 

What does this move mean for the investors?

As per Aditya Goela, CFA, Co-Founder of Goela School of Finance, from an investor's perspective, the implications of the increased FRP on sugar companies' stocks are multifaceted. 

"Higher FRP could potentially increase production costs for sugar mills, impacting their profitability. Additionally, the requirement to pay a higher FRP could lead to liquidity challenges for sugar mills, especially smaller ones, thus affecting their operational efficiency," said Goela.

Further, the impact of the increased FRP on sugar stocks is likely to be influenced by various factors, such as global sugar prices, domestic demand-supply dynamics, and regulatory policies. Investors will closely monitor how sugar companies adapt to the new pricing regime and their ability to maintain competitiveness in the market, Goela added.

While this decision is poised to benefit millions of farmers, its implications on sugar stocks warrant careful observation and analysis in the evolving economic landscape. Investors and stakeholders alike must navigate these changes judiciously to capitalise on emerging opportunities and mitigate potential risks.

Atul Parakh, CEO of Bigul, lauded the move and said, "With timely payments and policy interventions, the government fulfills its commitment to double farmers' income." 

However, he said, the move may pose challenges for the sugar industry in terms of higher costs, potential sugar price hikes, and pressure on margins and financial health, particularly for smaller mills.

Apart from this, sugar stocks have been in the spotlight continuously with various developments around sugar prices and production. Recently, Reuters reported that the global raw sugar price was to rise by 20 per cent this year, which many analysts said wouldn't affect India's market as India has enough produce. 

Meanwhile, according to a recent report by the Indian Sugar Mills Association (ISMA), the country's sugar production dipped 2.48 per cent to 22.36 million tonnes by February 15 of the ongoing 2023–24 marketing year. 

According to ISMA, sugar production in Maharashtra, Karnataka, Gujarat, and Tamil Nadu remained lower until February 15 of the ongoing marketing year.

Should you invest in sugar stocks? 

Zee Business Panelist Ambareesh Baliga recommended buying sugar stocks, as according to him, the increase in FRP could prove to be a game changer for some sugar companies.

"The move can be a game changer for sugar players who use PLA, which is a bio-based, bio-compostable, and 100 per cent recyclable biopolymer produced from renewable feedstock like sugar cane, and the increase in the FRP will benefit those companies," said Baliga.

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