In a second straight year of sugar glut, shares of Indian millers have surged. That’s because of the nation’s aggressive push to ethanol blending in transport fuels.
In the latest move, the government has doubled incentives on sugar sacrificed for producing ethanol from October.
India targets to achieve 20% ethanol blending with petrol by fiscal 2024-25. The nation also exported record sugar in the last season. Increased incentives for ethanol, which yields better profit than sugar, along with higher overseas shipments, have aided margins of millers, driving a rally in their shares.
How The New Incentive Works
Earlier, the Department of Food and Public Distribution, Ministry of Consumer Affairs released a monthly quota of sugar to be sold for domestic consumption by each miller based on the stock held, export performance and diversion for ethanol.
Under the revised plan, the incentive on sugar sacrificed for producing ethanol from B-heavy molasses, sugarcane juice, sugar syrup or sugar has been doubled from October in the monthly quota. The mills diverting sugar to the biofuel would get the entire quantity in their monthly quota, according to a government statement.
Effectively, the sugar set aside for ethanol won’t be accounted for to calculate the quota, allowing mills to use the inventory.
The move to double the incentives will benefit larger players with distilleries, Hetal Gandhi, associate director at Crisil Ltd., said in response to BloombergQuint’s emailed queries. And it may either push smaller players to integrate with larger peers or set up their own ethanol manufacturing capacities, Gandhi said.
Among the larger players, even though Balrampur Chini Mills Ltd. is the leader with the highest ethanol capacity, Dhampur Sugar Mills Ltd. will benefit the most given the scale of expansion, Sanjay Manyal, assistant vice president and equity research analyst at ICICI Securities, told BloombergQuint over email.
Avadh Sugar and Energy Ltd. may largely benefit from the move because of the inventory the company has piled up in the recent past, Manyal said.
According to the Manyal, the companies will continue to make a margin of Rs 1-3 per kilogram on sugar and an increase in distillery (ethanol) capacity will drive earnings growth in the next three years.
India has a 2% share in the global production of ethanol while it contributes 17% to the worldwide sugar output, according to a June report by ICRA Rating Ltd. By comparison, Brazil, the world’s largest producer of sugar with 18% share, makes 30% of the global ethanol .
Despite the government’s push, according to Crisil’s estimates, the country will be able to reach only 15% of the blending target by 2025, assuming the nation’s petrol demand at 5,000 crore litres a year.
The ethanol push, however, is one of the factors aiding sugar mills’ stocks.
The cost of production in India is higher because of regular hikes in fair and remunerative and state-advised prices to farmers. These were increased for the current sugar season as well.
Yet, even after a Rs 25 per quintal increase in SAP, Manyal said, the cost of production for sugar mills would rise by Rs 2 a kilogram. Prices of the sweetener, however, have jumped by Rs 4 a kilo in the last two months. What that means is the impact of cost inflation has been more than offset by the price rise.
A tight global demand-supply scenario, favourable policies, exports and ethanol blending are “doing their bit in rationalising the inventory levels in India”, CARE Ltd. said in a report. The sector, it said, is on track for a transformation.
Exports surpassed the target in the 2020-21 sugar season. Against the initial target of 60 lakh metric tonnes, Indian millers have signed contracts for 70 LMT, with 60 LMT exported till Sept. 28, according to a government statement.
As global prices are rising, the country is expected to ship 60 LMT in the sugar season that just began (October 2021-September 2022).
The international prices of sugar are on an uptrend, said a government statement, and contracts for export of about 15 LMT have been signed without the announcement of any export subsidy.