MUMBAI: Bajaj Hindusthan, the nation’s biggest sugar producer led a rally in the sector’s stocks as investors lapped up the shares in anticipation of higher prices for the commodity due to lower supplies and a government rule that may free the companies from states’ clutches in terms of prices paid to cane producers.

Balrampur Chini Mills rose 5.27% to Rs 144.95, Dhampur Sugar gained 2.28% to Rs 112.15 and Bajaj Hindusthan advanced 4.93% to Rs 36.20 on the Bombay Stock Exchange on Monday.

Sugar prices are at multi-year highs and may rise as the sugar production in the current year 2009-10 is expected to remain flat around 15 million tonnes even as rising incomes increase the demand for the sweetener.

Also, the government’s rule last week to fix “fair and remunerative price” eliminates the uncertainty of the past when different states fixed different prices with some state prices straining the finances of sugar companies.

Now, any difference between the remunerative fixed price by the central government and a state recommended price has to be borne by the states, unlike in the past where sugar companies paid the farmers the states’ minimum support price. The sugar year runs from October to September.

“The move to bring in a fair and remunerative price is an extremely positive step as it removes the skew in pricing between different states,” said Vivek Saraogi, MD, Balrampur Chini. “With a uniform price across the country, efficeincy will be the sole parameter to differentiate between the boys and the men in the sugar industry.”

These stocks have risen between 21% and 30% in the past one month, outperforming the BSE. Sensex has remained more or less flat during the period. Bajaj Hindusthan is the best outperformer among sugar stocks. It rose to a 52-week high of Rs 241.8 last Wednesday and gained about 30% during the month. Simbhaoli Sugars and Dhampur Sugar are the other two performers surging 23% and 21%, respectively. While Simbhaoli touched a high of Rs 76.9 on October 21, Dhampur climbed a peak at Rs 117 on Monday.

But some analysts caution that it may be an irrational exuberance to accumulate sugar stocks given the fact that the government has increased the levy sugar quota, i.e, a portion of sugar which the mills have to supply to the government-regulated public distribution shops at a fixed price. Also, the central government is yet to announce the fair price.

“The new minimum price to be fixed by the government would prove bullish for listed companies only if it is reasonably lower than the State Advised Price fixed by the states, including Uttar Pradesh,’’ said Ajay Parmar, head of research, institutional equities at Emkay Global Financial Services. “Most of the listed sugar stocks are from the UP belt. Therefore, the FRP would have to be substantially lower than the SAP to benefit companies such as, say, Balrampur Chini and Bajaj Hindusthan.”