India is imagining a future in ethanol. How are sugar companies gearing up for it?

If you have sugar stocks in your portfolio, congratulations! The stocks have been on a massive bull run over the past few months, on the back of the government’s push for ethanol blending.

Balrampur Chini is up 86% in the last 6 months, while Dwarikesh Sugar has bounced 154% and Shree Renuka Sugars has advanced 211% in the same time period.

For this fiscal, CRISIL anticipates sugar mills’ operational profitability to increase to 13-14%. But, how do sugar companies fit into India’s ethanol picture?

Govt’s plans

First, let us understand the government’s plans in detail. In June, the Central Government announced that the target date for achieving 20% ethanol-blending with petrol will be brought forward by two years to 2023. Currently, about 8.5% of ethanol is blended with petrol in India, a country large dependent on crude oil.

Addressing a conference organised by BRICS Network University virtually, Union Minister Nitin Gadkari said, “We are going to increase production of ethanol because the rise in petrol prices is causing a lot of problems to the common man.”

Right now, the country has an ethanol production capacity of 684 crore litre, which needs to be ramped up aggressively to 1000 crore litre in order to achieve the 20% blending target.

To further push the use of biofuels, the Ministry of Road Transport and Highway will also allow ethanol-based ‘flex engines’ in the country soon, and will be rolling out a scheme on the same in the next three months.

As per sources, the Modi govt has also told auto companies to start selling 2-wheelers compliant with 95% ethanol-blended petrol within one year.

The role of sugar companies and mills

According to a Niti Aayog report, ethanol is one of the principal biofuels, which is naturally produced by the fermentation of sugars by yeasts. It is used as a chemical solvent and in the synthesis of organic compounds, apart from being an alternative fuel source.

Mills typically crush cane with a total fermentable sugars (TFS) content of about 14%. Much of this TFS gets crystallised into sugar while the rest un-crystallised part goes into molasses, which yield ethanol.

As per the Indian Sugar Mills Association, every 100 kg of TFS yields 60 litres of ethanol. Thus, from one tonne of cane, mills can produce 115 kg of sugar and 45 kg of molasses that gives 10.8 litres of ethanol.

Gearing up

Dwarikesh Sugar: On July 9, the company embarked upon a project to set up a 175 KLPD distillery at its Dwarikesh Dham unit in Bareilly, Uttar Pradesh with an investment of Rs 232 cr. While the existing capacity of the unit is 162.5 KLPD, the proposed capacity is to be added in 15 to 16 months. “This project announced is in line with government’s commitment to broaden the ethanol manufacturing base from agricultural resources. The proposed distillery will turn to B Heavy molasses route (or grain) during the off season for continuous manufacture of ethanol,” the company said in a filing.

Shree Renuka: On June 26, Shree Renuka Sugars announced that the company will invest Rs 450 crore to expand its ethanol capacity by October 2022. “Considering the huge untapped demand for ethanol due to the policies of Government of India, the Board of Directors of the company approved further capacity expansion for ethanol production from 970-kilo litre per day to 1,400-kilo litre per day,” the company filing said.

Balrampur Chini: The company in April informed that its board has approved a higher investment of Rs 425 crore for a new distillery plant of 320 kilolitres per day (KLPD), which is expected to commence by December 2022. It also said that it plans to borrow Rs 220 crore from banks under the scheme for extending financial assistance for enhancement of ethanol capacity as announced by the Govt.

Dalmia Bharat Sugar: The company is all set to increase its ethanol manufacturing capacity to 15 crore litre per annum from the current 8 crore litre starting January 2022. The expansion will happen at the company’s plant at Jawaharpur, Nigohi and Kolhapur plants. And, one new distillery will also be set up at Ramgarh. “This move will allow the industry to cut carbon emissions and reduce the outflow of foreign exchange as crude oil imports will come down,” said BB Mehta, Whole Time Director, Dalmia Bharat Sugar and Industries.

With such capex plans, the stocks might get sweeter! Do you think it is the right time to add them in your portfolio? Let us know.