Sugar stocks firm up on hopes of rising demand for ethanol

Sugar stocks firm up on hopes of rising demand for ethanol

Sugar stocks across the board made sharp gains since Tuesday, as positive developments at the policy level, forced investors to take a re-look at the sector. About 20 sugar stocks rose 10-18% in the last two trading sessions.

On Wednesday, a day after Mint reported that a group of ministers (GoM) had recommended mandatory blending of 10% ethanol in petrol, these stocks moved up by 9.3-17.7%.

The GoM’s recommendation is subject to approval of the cabinet committee on economic affairs. Currently, states have the option of blending 5% ethanol with petrol.

Upper Ganges Sugar & Industries Ltd, part of the KK Birla Group (K.K. Birla is chairperson of HT Media Ltd, Mint’s publisher) is the biggest gainer in the camp. In the past two days, the stock has gained around 18%. Oudh Sugar Mills Ltd, another sugar firm owned by the group, gained more than 12% during this period. Other top gainers include Sakthi Sugars Ltd, K.M. Sugar Mills Ltd, Dharani Sugars & Chemicals Ltd, Simbhaoli Sugars Ltd, Monnet Sugar Ltd and Dwarikesh Sugar Industries Ltd.

Sugar stocks in India performed badly over the past few months, as production soared over demand. The price of molasses, a by-product in the manufacture of sugar that is used to distil alcohol, which was at about Rs4,000-5000 per tonne last year, crashed to Rs1,000-2,000 this year.

A sugar mill produces about five tonnes of molasses for every 100 tonnes of sugar cane crushed, according to Dhampur Sugar Mills Group executive?president?(finance) Arhant Jain. “Ethanol is produced by removing 3% of water from rectified spirit. About 220 litres of rectified spirit can be produced out of one tonne of molasses," he adds.

India’s state-owned oil marketing companies had earlier invited tenders from integrated sugar companies to supply ethanol for a three-year period. Integrated sugar companies are those that manufacture sugar as well as produce ethanol. “We have received tenders approved by all the petroleum companies. The price of ethanol has been fixed at Rs21.50 per litre," Jain says.

All sugar companies listed on the Bombay Stock Exchange were part of the rally: 31 sugar stocks were up since Tuesday. Shares of Venus Sugar Mills Ltd—the smallest listed sugar firm, with market capitalization under Rs16 crore—went up as much as 11.4% since then.

However, analysts are not very bullish on the long-term future of the sector. “The momentum in the sugar counters (stocks) may continue for some more days, but we have maintained a sell call on major sugar stocks," says Amar Ambani, head of research at India Infoline Securities Pvt. Ltd, a 100% subsidiary of India Infoline Ltd, a financial services provider.

Ambani said prices also rose on rumours that the Centre could announce a potential relief measure to bail out the sector, and that the Uttar Pradesh government had sought loan extensions to sugar firms.