It is a well established fact that ethanol is likely to change the profitability profile and valuation profile of the beleaguered sugar space in India. Stocks have moved up 2X, 3X and profitability is likely to improve in the next two-three years. What are your thoughts on that and how much of that is built into the valuation profiles of the key stocks which you cover?
The last two or three years we have seen relief measures like ethanol blending programme or the introduction of MSP and export incentives for the sugar companies. Some of these were short-term relief measures like export incentives and the MSP and some of them were long-term ones like the ethanol blending programme.
Till last year, we were worried whether the ethanol blending programme will actually take place or not or whether it will grow at a meagre pace. But look at the kind of procurement that is happening now by the OMCs. They will be procuring approximately 300 crore litres of ethanol this year, compared to 180 crore litres last year. The case has gained momentum and for the 10% blending that the government has decreed, the country would require 400 crore litres of ethanol and we have a clear roadmap for 15% and 20% blending levels in the next four to five years.
From the earnings perspective, most of the sugar stocks, which six to eight months back were trading with a 3-4 times price to earnings multiple, are now trading at 9-10 times multiples. Once the visibility of earnings is pretty strong, at least for next three to four years, the valuation can be much higher because we believe company to company, approximately 50% to 25% kind of earning CAGR is expected in next three to four years and it depends completely on the capacity these companies have. We believe there is scope for rerating valuation multiples from here also.
You track four stocks — Dwarikesh, Triveni Engineering, Balrampur and Dhampur. In terms of profitability for FY23, which of these companies will see maximum delta?
The formula is pretty clear; whoever has the higher ethanol capacity in comparison to sugarcane crushing capacity will benefit the most and within that space, Dalmia Bharat Sugar has been expanding its capacity pretty fast. They are almost doubling their capacity by March 2022 and we believe that they will benefit the most.
Also they have benefitted from exports due to higher global prices. So Dalmia certainly will be a beneficiary.
Balrampur is the largest player in the space, they will also be a beneficiary but their capacity is coming somewhere between October and December 2022 and given that it is a green field project, the earnings will be much higher in FY24 rather than FY23 for Balrampur. We believe in FY23, Dalmia Bharat Sugar, Triveni Engineering will be better plays. Balrampur being the largest or the most efficient company in the space would also be a beneficiary.