With the GDP numbers suggesting that the key growth driver is agriculture, growing at 3.9 per cent compared to 0.7 per cent in FY2005, experts say it has a better potential than others like oil and metals in the commodities space. Even in agriculture the safer bets happen to be sugar, and tea stocks.
Marketmen expect, sugar, tea stocks to grow by 25-30 per cent and 15-20 per cent respectively in the next 6-12 months.
The tea sector is on a boom with factors like strong domestic demand, supply shortage and international demand, triggering it further. The strategic positioning of India is an added advantage for the country, as this will bring in better exports from markets of Russia and Pakistan.
With Kenya, world's leading exporter of tea, still battling a drought, India will get a chance to step up its overseas sales, especially to Pakistan, after its exports dropped in the first quarter.
Kenya has been experiencing severe drought since November 2005. This has created a shortage of nearly 16 per cent in its global output. Pakistan has traditionally bought 80 per cent of the 170 million kg that it consumes annually from Kenya, but bad weather had hit the east African country's output.
On the other hand, sugar companies will enjoy revenues from streams like carbon credit, power and ethanol blending. The sector will get its main trigger from the order given by the government to increase blending of ethanol in fuel by 5 per cent now, and by 10 per cent by October 2007.
S P Tulsian, Investment Advisor, says that "Now if you look at the present valuations of the sugar shares, they are quite attractive considering the productions going ahead for the sugar season in 2006-2007."
He said, "In commodities, agriculture stocks have better potential because of an increase in production, better utilization and better realization of commodity prices. In agriculture, sugar is the principal commodity and after that may be tea and rubber.
"For Indian sugar companies, the outlook is good. From the current levels one can expect a 25 per cent upside for sugar stocks in 6-12 months."
In commodities sugar, tea and rubber can be termed as safer bets, Tulsian further said.
Talking about the news that Japan may import sugar and ethanol from India as imports from Brazil is expected to fall owing to an increase in demand there, Tulsian said, "Our surrounding countries like Japan, Pakistan, China, Srilanka, Bangladesh are all net importers. India can cater to all these markets because logistically we are better placed. Next year our production will be quite good to around 22-23 million tonne."
According to him, tea and rubber should also give reasonable return of around 15-20 per cent in 6-12 months.
Stocks like Balrampur Chini, Bajaj Hindustan, and Triveni Engineering are some good picks in this space.
Ravindra HC, KR Choksey Sec, is of the view that sugar and tea stocks are available at good valuations and look good from an investment perspective. "The bull run in commodities like tea and sugar will be there. Sugar prices will be there at a peak for the next two years. They are nowhere near the saturation of their earnings. We are expecting 30 per cent growth from the sugar sector in the next 12 months."
According to Ravindra, tea and the sugar sector will be driven by demand. "In tea there is a strong demand. The productivity had been falling because earlier tea prices were depressed and accordingly the tea estates were not maintained.
After re-plantation, the real utilisation will come into effect in three years. Meanwhile, the demand for tea is growing. After the shortage of supply from Kenya, Pakistan has started looking at India."
So, factors like strong demand, supply shortage and growing international demand will trigger the tea sector.
Sugar companies are also seeing potential from streams like carbon credit, power and ethanol.
He said, "Sugar companies were getting revenues from molasses that they were selling, which was not that good. But, now from molasses they are getting ethanol, which will be used by the oil companies.
"Most of the sugar companies are getting into co-generation plants. They are enjoying carbon credits as well. The sugar companies are seeing potential from streams, carbon credit, power and ethanol. These stories were already there, but to realise it needs a couple of month's time.
Ravindra picks up stocks like Mawana Sugar, Bajaj Hindustan and Tata Tea in the above-mentioned space.For more such reports, log on to www.moneycontrol.com
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