Sugar counters look good; not much scope in tea, rice

Sandip Sabharwal
CEO (PMS), Prabhudas Lilladher

In the Indian context, there are very few sectors and stocks through which one can take a direct exposure to agricultural commodities. The most established sector in terms of number of companies available for investment and the long-term history of institutional participation is the sugar industry, in which there are a large number of investible options. This is one sector for which the prospect looks positive over the next 12-18 months given the fact that there is a significant demand-supply mismatch for sugar in the international context. Domestically too, India will need to import sugar for the next two years, at least.

Tea is a sector where the number of pure plays that are listed is limited. But even those scrips are largely illiquid. The bull story for tea has come several times over the past few years. However, as a sector it has never really performed or met investor expectations. At present, there is a lot of interest in the sector due to poor production in Kenya and lower production in India, which has led to the firming up of tea prices and improved profitability for tea companies. However, in case of tea there is always a cost push and the volatility of prices is quite high. In my view, as an investor it is difficult to play this sector.

In rice also, there are several companies that have done well over the past few years. This is one sector where the potential is there. But one has to evaluate individual companies closely. Given the restrictions on paddy trade as well as the fall in production that is likely in the near term, there can be a profitability boost. But there is also adequate rice stock from last year’s bumper crop. As such, the performance can be mixed.

Overall, the agriculture space should offer significant opportunities to investors over the medium term as we get more companies that are into agriculture and food processing. Till that point of time, investors will have to be satisfied about investing only in a handful of companies.

source: mydigitalfc