Sugar stocks in the market are not always sweet as the product is to taste. Rarely do they gain momentum and play up to give good profits. The reason behind this pessimism is because most of the sugar mills are owned by politicians and almost all of them make use of the bureaucracy for their favour and not bring any benefit to the company.
Towards the end of 2015, Sugar stocks began to show strong upward movement in their price which was followed by their balance sheets showing good numbers. Many a time such number crunching happens and it fades away as it came, like a surprise. While this time it was different, strength in Sugar stocks followed with Paper gaining strength too, it showed that, Sugar rally was not false, there is something really brewing underneath.
Almost all the sugar stocks had similar pattern, the reason was a drought in Maharastra, which is a dominant sugar producer and supported by global prices moving up. Our mills had something more in store. They had finished their crushing season, where their cane procurement came at fairly lower prices. This meant that, mills are going to be the ultimate beneficiaries of all the price increase in Sugar. Sugar price in the retail markets went up from 35 to 57 per kilogram. And all the difference in price was profit to the companies, which was showing up on the balance sheet.
Sugar stocks gave close to 1000% return in the last 2 years. Portfolios that had sugar stocks in them made solid gain in this period. We were one among them; we had exposure all the high volume sugar stocks in our portfolio. We made above 300% gains on our investment in the 2 year period between all the sugar stocks we held with us.
As we do a system based approach to investing, we did not pick up at the bottom of the price stack and did not sell at the top. We entered after good confirmations on the performance, as this sector is prone to deceive investors. Then our exits too were a little late as the price of Sugar took a sudden slide due to various reasons that brought pressure.
End of 2017 was the exit for Sugar stocks and after that the slide in prices have been phenomenal as stock that began at 32 in September 2015, went up to 325 in November 2017, takes a dive to reach below 100 by April 2018. The correction was pretty sharp.
We took the cream of the cake in the price rally, now do not own any sugar stock in our portfolio. The reason for the fall is the high supply of the commodity in the international markets, mills have been forced to export 20% of their produce, so that, and there is lesser damage in the local markets due to high supplies. And up on this, the government has asked mills to give advance payment to farmers for their next crushing season procurement. To arrange for funds, they have to export at lower prices.
The beauty of being a stock investor, we participated in the price rise, made our profits, moved out at the right time and now hold investments in other sectors which are in the up move. No pain of demand supply crunch, no government intervention only profits all the way, while one needs to be smart to get in and out at the right time.