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Tezzbuzz Desk: The month of August was very good for sugar stocks in the stock market. There was tremendous buying in the shares of Chinese companies and many stocks gave returns of 25 to 40 percent to the investors in a short time. The main reasons for this rise have been the rise in sugar prices, concerns about domestic and global supply and expectations to ethanol business. However, after such a sharp rally, now market experts are advising to be cautious regarding the valuation of these companies.

Awadh Sugar and Energy was at the forefront in the rise in August. On July 31, the company's share was at ₹504.65, which increased to ₹804.15. In this way investors got an excellent return of about 59.35 percent. Shares of Dwarikesh Sugar Industries rose by 38.01 percent and Dalmia Bharat Sugar rose by 35.63 percent. Mawana Sugars returned 32.52 percent, Dhampur Sugar Mills returned 26.57 percent and Dhampur Bio Organics returned 26.45 percent. Bajaj Hindustan Sugar also rose 26.06 percent. However, the performance of Godavari Biorefineries remained weak and its share fell by 8.51 percent. The rise in sugar prices is the main reason behind this rise in sugar stocks. There has been increased concern regarding the supply of sugar in the domestic market as well as in the global market. There is a possibility of production and supply being affected due to bad weather in big sugar producing countries like Brazil and Thailand. If global sugar prices remain high, earnings and profits of Indian sugar mills may improve. This expectation has increased the interest of investors in this sector.

Ethanol has also emerged as a major growth driver for Chinese companies. The policy of increasing ethanol blending in petrol in India has given sugar mills an opportunity to diversify their sources of income. The market is now seeing many Chinese companies not just as agri-based businesses but also as green energy companies. This is the reason why many companies in this sector have benefited from re-rating in the market. However, experts believe that after the recent rise, investors need to be cautious. According to Avinash Gorakshkar, founder, Avinash Mentor Research, the rally in sugar stocks reflects a re-rating of the sector, but a large part of the potential gains from 20 per cent ethanol blending has already been factored into the current share prices. Harshal Dasani, Business Head, Invest PMS, believes that the market has already factored in the expected earnings of the next two quarters to a great extent.

Increase in ethanol prices could become a new trigger for sugar stocks in the coming time. Apart from this, if supply- problems persist in Brazil and Thailand and global sugar prices remain high, then Indian companies can benefit from it. On the other hand, ban on exports, tightening of quotas or other policy measures by the government can put pressure on the growth of these stocks. According to experts, in the coming times, investors should pay more attention to companies with strong balance sheet, less debt and better ethanol capacity rather than companies dependent only on sugar production. Rahul Sharma, Head of Research, Equity99, has described Balrampur Chini Mills as the top pick in this sector. The company's crushing capacity is 77,500 TCD and distillery capacity is 560 KLD. Overall, the August surge in sugar stocks has given investors a great earning opportunity, but now seeing this surge, investing without thinking can be risky. The future direction of these stocks will depend on sugar prices, ethanol prices, global supply and government policies. In such a situation, it will be more important for investors to take decisions keeping in mind the valuation and financial condition of the company.