Sugar rush: Producer stocks advance after govt eases curbs on cane-based ethanol

Shares of Bajaj Hindusthan Sugar, Balrampur Chini Mills, Bannari Amman Sugars, Triveni Engineering and Industries, Dalmia Bharat Sugar and Industries, and Shree Renuka Sugars advanced after the curbs on ethanol production were lifted.

According to experts, the government’s decision is an early sign of positivity for the sugar sector, which has languished for the better part of 2024. The top six sugar companies had posted an average year-to-date return of about 25% before the announcement on Thursday.

 

“Definitely this (decision) will increase the revenue of the companies in the short to medium term," Kranthi Bathini, director of equity strategy at WealthMills Securities, told Mint. “Sugar stocks have been in a consolidation phase for the past seven-eight months. Now a breakout has started following this news."

The government lifted restrictions on production of ethanol from sugarcane juice and B-Heavy and C-Heavy molasses for the marketing year 2024-25, which starts on November 1. The decision to allow distilleries to participate in Food Corporation of India’s rice auctions during August-October for ethanol blending further sweetened the deal, analysts said.

“The announcement was timely, just two months before the start of the new crushing season. This will provide much more clarity to the industry," Prashant Biyani, vice president of institutional equity research at Elara Capital, told Mint. “However, this news was in line with the industry’s expectation."

Scope to rise

Market participants said sugar company stocks are undervalued right now and have room to rise. However, a broader re-rating of the sector will happen only if additional policy changes are announced, they said.

“First, an MSP (minimum support price) increase for sugar. Second, an upward revision in ethanol prices, especially after the rise in sugarcane prices. And third, lifting the ban on raw sugar exports," Biyani said.

India imposed an indefinite ban on sugar exports in June 2022 due to concerns over a poor crop and rising domestic prices.

Analysts said the decision on Thursday will restore much-needed investor confidence in the sugar sector because the curbs on ethanol blending had led to dismal performances of these companies for the past two quarters.

The government has set a target of blending 20% ethanol in petrol by FY26 under the Ethanol Blended Petrol Programme. Ethanol production has been a profitable business for sugar companies, while reducing consumption of petrol.

However, in a bid to curb inflation ahead of the general elections earlier this year, the government imposed restrictions on sugarcane-based ethanol production in December. This led to higher sugar output in the current marketing year, which resulted in three negative factors, analysts said.

Also Read: Govt removes cap on sugar diversion for ethanol production for ESY 2024-25

Firstly, sugar prices fell, which led to lower realisations for producers. Secondly, a higher sugar inventory led to an increase in the cost of carrying these stockpiles. Lastly, their working capital requirements went up as sugar production is a capital-intensive business, which led to a higher debt and interest burden in the mills’ books.

However, “since the focus will now shift towards ethanol production, both their earnings and balance sheet will improve," Nikhil Saboo, head of research at SKP Securities, told Mint. “Their earnings will improve because of a better revenue and profitability mix from ethanol and sugar production, while their balance sheets will improve because of less inventory, less working capital requirements and less interest outgo."

Current domestic raw sugar prices have firmed up slightly to about ₹39/kg from recent lows and analysts expect a further uptick in prices in the upcoming festive season. This might lead to better realisations for sugar companies, they said.

Domestic sugar prices in northern India after the ethanol ban in December declined to ₹37/kg from highs of above ₹40/kg.

Overseas opportunities

The outlook for sugar production in India seems to be healthy, according to analysts. The Indian Sugar & Bio-Energy Manufacturers Association (ISMA) estimates production at about 33 million tonnes and consumption to be 29 million tonnes for the marketing year 2024-25. That compares with output of 34 million tonnes and consumption of 29.15 million tonnes in 2023-24.

Also Read: Centre explores ways to stabilize sugarcane production amid weather shocks

ISMA expects 13 million tonnes of surplus sugar to be available in the upcoming marketing season, compared with a surplus of 4.85 million tonnes a year earlier. Of the expected surplus, 6.5 million tonnes have to be set aside as buffer stock.

“Even if we divert around 4.5 million tonnes of the surplus for our ethanol blending programme, we will still have at least 2 million tonnes left for exports, over and above the normative stock," Deepak Ballani, director general of ISMA, told Mint. “We believe that this is the right time to allow exports as current global prices are favourable for Indian sugar."

 

Market participants said the recent disruption in global sugar supplies due to a wildfire in Brazil last week presents a golden opportunity for Indian sugar producers. Output in Brazil, the largest sugar-producing country with a 25% market share, was estimated at 45.54 million tonnes in the current year, according to the US Department of Agriculture.

“International prices have shot up in the last few days because of the fires in the Brazilian cane fields. If we have a timely decision on exports, then the industry can reap the benefits of higher prices," Biyani said.

Also Read: Why India's sugar mills are bitter

Global sugar prices surged 13% to 19.81 cents/lb on Friday from 17.57 cents/lb on 20 August.

“A timely announcement (on lifting the export ban) will give time for companies to enter contracts at better prices. Entering into a contract at 20 cents/lb (current prices) will be better than entering at 18 cents/lb (prices a couple of weeks ago). If the news of wildfire or temporary shortage persists, prices can go higher," he added.

While a decision to lift the ban on sugar exports seems to be a long shot for now, market participants said that with no more potential negative news around the corner, sentiment in the sugar industry is likely to improve.