Sugar Stocks are heavily oversold & can be bought: Experts

Discussion in 'Traders Corner' started by Michael Gonsalves, May 25, 2022.

  1. Michael Gonsalves

    Michael Gonsalves Member Staff Member

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    Sugar Stocks are heavily oversold in the fear & misunderstanding that the Govt's decision to limit exports is negative, while it is in fact not.

    Sugar stocks are a traders' delight because of the fast pace at which they move up and down. Presently, the entire sector is in the dolrums owing to the Government's decision to limit sugar exports.



    Balrampur Chini, the flagship of the sector, plunged 8% today after a similar fall yesterday. It has lost 14% in the last five days and 25% over the past 30 days. However, it is still positive with a return of 21% on a YoY basis.

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    Limit on exports upto 10MT has no impact as the expected actual exports will be lesser. There is no cap on prices

    Varinder Bansal of Omkar Capital PMS Fund, is regarded as an authority on the sugar sector. He has pointed out for the sugar season 21-22, the estimated export of sugar is 9.5 MT as so the cap of 10MT will have no adverse impact.





    Varinder Bansal also drew attention to the concall of Mr. Vivek Saraogi, the MD of Balrampur Chini. Saraogi categorically stated that the Government's decision is not at all negative for the sugar industry and that there is NO risk to ethanol pricing or quantity. He also clarified that there is no cap on the price at which sugar can be sold, locally or outside.



    According to a report in the Business Standard, the immediate aftermath of the ban is that prices of sugar might soften by at best 50 paise per kg before returning to their usual levels. It is also stated that with 10 MT of exports, 35.7 MT of sugar production & 27.8 MT of sugar consumption, closing sugar inventory would be close to 6.0 MT. This would keep sugar prices firm. Brokerage ICICI Securities was quoted as saying that this would not have any impact on sugar companies’ fundamentals.

    Sugar export restriction is a rational step:

    Pramod Patwari of Balrampur Chini described the sugar export restriction is a "rational step" by the Government, implying that the Industry is not worried about the adverse consequences. He also stated that the domestic sugar prices will not move higher as the inventory is huge.



    What trade to take?

    Assuming that the theory that the sell-off is excessive is correct and the sugar stocks stage a rebound, I decided to take advantage of the situation by selling a lot of Puts at the strike price of Rs. 350 on Balrampur Chini for the premium of Rs. 21.6.

    This means that my BEP on the trade is Rs. 328.4 (Rs 350 - Rs 21.6).

    If the stock closes above Rs. 350 on 30th June, I can keep the entire premium of Rs. 34560 (1600 x 21.6). If the stock closes below Rs 350, I will take delivery for which I have kept aside Rs. 5,60,000 (Rs. 350 x 1600).

    The return on the capital is 6.28%.

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