Buy sugar stocks gradually if decontrol proposals are approved: Analysts

MUMBAI: Shares of sugar companies were in action on Wednesday on reports that the food ministry is planning to get rid of five decade-old curbs by seeking Cabinet approval to de-regulate the sector.
The government is keen to abolish the release order mechanism -- a move which will free the sugar sector from its clutches -- and also remove levy under which millers have to set aside a specific portion of their annual output for selling through the Public Distribution System (PDS).
According to analysts, proposals such as removal of levy will be positive for the companies and the stocks have already rallied in anticipation of the positive news-flow.
Under the present system, every sugar mill has to supply 10 per cent of the production to the Central government as a levy quota for PDS purpose at a subsidised price.
The policy recommends removal of levy quota which will result in an estimated saving of Rs 30 billion to the industry.
"In our view, removal of levy sugar and export restrictions will be a huge positive for sugar players," said Manish Mahawar, sector analyst, EdelweissBSE 0.15 %.
However, the sector will remain subdued unless industry dynamic improves. Surplus sugar production and lower international prices are some of the key concerns.
Analysts are advising investors to gradually increase holding in sugar stocks, if the proposals are finally approved.
The proposal for removal of release order mechanism is expected o have a moderate positive impact on the sector.
"The Cabinet note for the removal of release order mechanism, if approved, will provide Indian sugar mills the flexibility to appropriately time their sugar sales, better inventory and cash flow management. Sugar sale timing may potentially cause higher volatility in sugar prices. While some moderate benefit will accrue to the sector, the policy will not be a game changer," said Aswini Picardo, Associate Director, India Ratings & Research.
The decontrol of sugar was strongly recommended last year by a committee led by C Rangarajan, the influential head of the Economic Advisory Council of the Prime Minister.
The committee has also suggested rationalization of sugarcane pricing and the liberalisation of sugar trade to be introduced over 2-3 years in a calibrated and phased manner.
Following are the technical views on sugar sector stocks by Sujit Deodhar, Head-Technical Analyst, Wellworth Share & Stock Broking:
Sugar stocks have seen a surge after a longtime of under-performance. These stocks have picked up the momentum and look good for a short-term bet.