The graphic considers point-to-point returns on Indian sugar stocks since the start of 2021. The returns are in a wide range but the message is crystal clear. Four of the five largest sugar stocks by market cap, gained over 100% in the first 5 months of 2021. EID Parry yielded 28% in 2021; which itself is not bad. For other major sugar stocks, returns range from 102.65% for Balrampur Chini to 179.88% for Dalmia Sugar. This kind of a vigorous sectoral performance is indicative of a structural shift in Indian sugar stocks. In one word, that is “Ethanol”.
What exactly is this Ethanol story for sugar stocks?
In its April 2021 newsletter, Biofuels International, highlighted how India’s ethanol blending had touched record levels of 7.2% in the first four months of 2021. Ethanol is a by-product of sugar mills and used to blend with Petrol. This not only makes petrol more environment-friendly, but substantially reduces India’s dependence on crude imports.
For a long time, India was conservative about ethanol blending, since sugar was politically sensitive. With a global glut of sugar and India producing huge surpluses, exports is one option. But that has to be subsided and has a cost. The other option is to boost ethanol blending in petrol. India has set a target of 10% ethanol blending by 2022 and it appears to be on target for that.
However, the big boost has come from the recent decision to advance the target date for 20% ethanol blending. That was first set for 2030, then advanced to 2025 and now it stands advanced further to year 2023. That implies a huge revenue and profit opportunity for sugar stocks which could roll out in the next one year.
8 reasons why Ethanol blending is a big story
Ethanol blending is going to be a big boost to sugar manufacturers and also for the shape of the macroeconomy. Here is how.
- It is estimated that ethanol production will facilitate the diversion of excess sugarcane and sugar to ethanol and help sugar mills deal with surplus stocks. Not only will farmers get their outstanding dues, but also a better price due to higher yields on ethanol.
- At a macro level, India currently depends on imports for 85% of oil needs. Boosting ethanol blending from the current 7% to 20% in next 2 years can substantially reduce crude import dependence and improve trade deficit.
- What will be the profit impact of ethanol blending? CRISIL estimated that the combination of higher sugar exports (thanks to export subsidies) and higher ethanol blending could boost sugar operating margins by 100 bps to 14%.
- The procurement price of Ethanol has been on a continuous rise due to the fact that it is also a matter of national priority. Hence, sugar mills will benefit from ethanol volumes and realizations. For FY21, the ethanol procurement sourced from molasses and sugarcane juice was up 5-6% yoy on an average.
- In the current sugar season (Oct-20 to Sep-21) it is estimated that 20 lakh tonnes of sugar production will be diverted to ethanol manufacture. This would keep ethanol prices stable and curtail glut of sugar stocks. Ethanol incentives are set to continue.
- The dip in Brazilian sugar production is expected to keep the prices of sugar and ethanol elevated globally. That is good news for sugar manufacturers as it ensures healthy profit margins on ethanol blending.
- India’s ethanol production is 2% of global ethanol production, while its share of global sugar output is 17%. This imbalance needs to be rectified and that is likely to be the big opportunity for sugar companies to tap in the coming quarters.
- India currently has ethanol capacity of 4.25 billion LPD. By 2022, onstream capacity will touch 5.25 billion LPD, which will enable 10% ethanol blending in fuel. However, to achieve 20% blending will need 10.50 billion LPD, which is a tough ask.
Ethanol Blending has come a long way
With crude at $70/bbl and petrol above Rs.100/litre, it opens a huge window for sugar companies to focus on ethanol. OMCs procured just 38cr litres of ethanol in SY2013-14 which is likely to scale 283cr litres in 2020-21. In value terms, the total ethanol bought by OMCs in SY2020-21 would be worth Rs15,800cr.
Ethanol does not need subsidy and government has to only keep its duty structure lower than sugar. That is logical considering its larger green implications. There is additional ethanol capacity coming onstream from DCM Shriram, Renuka Sugars, Godavari Biorefineries, Balrampur Chini etc. If ethanol blending takes off, it improves cash flows, clears farmer’s dues and improves the economics of sugar. That is the big difference ethanol can make!