Sugar stocks Triveni Engineering, Praj Industries and others surge up to 8.7%. What’s behind the rally?

Sugar stocks surged sharply in intraday trade on Monday, September 16, after the Department of Food and Public Distribution (DFPD) authorised sugar mills and distilleries to produce Rectified Spirit (RS) and Extra Neutral Alcohol (ENA) using sugarcane juice and B-heavy molasses. 

This move is expected to enhance production flexibility for ethanol and other alcohol-based products, supporting the industry's diversification efforts.

Following this positive development, several sugar stocks saw sharp gains, led by Triveni Engineering with an 8.7 per cent rise, followed by Dhampur Sugar Mills (up 4.3 per cent), Dalmia Bharat Sugar (up 3.5 per cent), Sakthi Sugars (up 3.5 per cent), Shree Renuka Sugars (up 3.4 per cent), KM Sugar Mills (up 3.4 per cent), Ugar Sugar Works (up 3.2 per cent), Rajshree Sugars & Chemicals (up 2.74 per cent), Praj Industries (up 2.74 per cent), and Balrampur Chini Mills (up 1.53 per cent).

Ethanol sales may surge as govt eases sugar diversion rules

In a significant move to improve the financial health of the sugar industry, the government, on August 30, lifted restrictions on using sugarcane juice, sugar syrup, and B-molasses for ethanol production in the 2024–25 ethanol supply year (ESY). 

This decision reverses last year’s ban and is anticipated to increase ethanol sales by diverting more sugar towards ethanol production, providing relief to sugar companies struggling with high inventory levels in FY24. Additionally, distilleries have been allowed to purchase up to 2.3 million metric tons of rice from the Food Corporation of India exclusively for ethanol production. 

The policy change is part of the government’s ongoing efforts to enhance ethanol production and promote sustainable energy. India achieved its 10 per cent ethanol blending target for the ESY 2021-22 by June 2022, ahead of the original November deadline. The country is now targeting a 20 per cent blending rate by 2025–26 and is exploring the introduction of a 5 per cent ethanol blend in diesel (ED-5) as it approaches this goal.

Official data shows that ethanol blending in India reached 13.3 per cent by July of the current season, up from 12.6 per cent in the 2022–23 season. The country’s total ethanol production capacity currently stands at 1,589 crore litres, with oil marketing companies (OMCs) purchasing 505 crore litres for blending during the 2023-24 season.

Govt's ethanol policy shift to revive sugar companies' cash flows

India Ratings and Research (Ind-Ra) emphasised that the government's recent decision to lift restrictions on sugarcane-based ethanol production will support the cash flows of sugar companies, which saw a 30 per cent decline in ethanol sales during the first seven months of the 2024 ethanol supply year (ESY).

It said that the restrictions, imposed in December 2023, had negatively impacted revenue and EBITDA in late FY24 and early FY25. With the changes, sugar diversion towards ethanol is expected to rise to 4 million tonnes in SS25, up from 2 million tonnes in SS24, reducing inventory.

However, stock levels will still exceed normative requirements. Ind-Ra also expects ethanol prices to rise 3-5 per cent in ESY25, helping to offset increased production costs.

On track to achieve 20% ethanol blending target

Following the removal of restrictions on the use of sugarcane juice, sugar syrup, and B-molasses for ethanol production, the industry is optimistic that the government's target of achieving 20 per cent ethanol blending by 2025–26 will be achieved.

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