Just to clear one misunderstanding about cyclical investment like sugar. Ben Graham in his famous book security analysis has following observation ” When a rise in the price of a commodity occurs, there will ordinarily be a larger advance, percentage-wise, in the shares of high cost producers than in the share of low-cost producers. Contarary to the general impression, the stock of high cost producers are more logical commitments than those of low cost producers when buyer is convinced that a rise in the price of a commodity is imminent and he wishes to exploit this conviction to the utmost. “. Also generally highly debt and most inefficient companies tend to give higher returns than strong balance sheet companies. So cyclical investing in that sense is bit counter intuitive. Also because conditions of sugar companies are worst among all cyclical like steel, mining, oil etc so their return is also likely to be highest among all cyclical also during up cycle. For example during sugar cycle of 2003 – 2006 , return of popular sugar companies are below in no of times:
Balrampur – 20, EID Parry – 19, Dhampur – 37, Sakthi – 31, Oudh sugar – 44. while for major steel companies return is between 3- 7 times and cement companies return are 5-10 times during similar period in previous major commodity cycle.
Note: This summary is sourced from Parag Parikh book of value investing and behavioral finance.
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