Markets
For sugar stocks, ethanol prices must hit sweet spot
Summary
- Shares of sugar companies such as Balrampur Chini Mills Ltd and Triveni Engineering & Industries Ltd are down 28-33% from their 52-week highs seen in April.
Shares of sugar companies such as Balrampur Chini Mills Ltd and Triveni Engineering & Industries Ltd are down 28-33% from their 52-week highs seen in April. A significant upward revision in ethanol prices would help improve investor sentiments. These companies have undertaken capital expenditure plans to raise their distillery capacities which is why higher realization from ethanol sales is welcome.
The government of India continues to push the Ethanol Blending Programme (EBP), which is reflected in a robust demand from oil marketing companies, equivalent of 10% EBP, and this is expected to go up to 12% in ESY23, said analysts from JM Financial Institutional Securities. It is also reflected in continued assistance on capacity expansion (distillery capacity at 8.9 billion litre, as per industry sources), they added.
ESY stands for ethanol supply year, which is from December to November.
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Further, the ethanol blending target of 20% in petrol has been expedited to ESY 2026 from ESY 2030. The government has raised the fair and remunerative price of sugarcane for sugar season (SS) 2022-23. The season runs from October to September.
Against this backdrop, developments on ethanol prices would be key to track for investors. The ethanol prices could be increased by ₹2-3 per litre for ESY 2023, said news reports.
Given increasing traction for ethanol, the sugar industry is diverting more supplies for ethanol production. In SS2021-22, 3.4 million tonnes of sugar production were estimated to be diverted for ethanol, according to Indian Sugar Mills Association (ISMA). In SS23, the quantity is likely to increase to 4.5 million tonnes.
As such, the continuity in ethanol programme is also dependent on the stability in domestic sugar prices. To meet this objective and ensure adequate domestic availability of the commodity, the government had regulated sugar exports for SS22 with effect from 1 June. Initially, it capped the export volumes at 10 million tonnes, but following the record sugar production, an additional 1.2 million tonnes of exports were allowed.
In SS23, in view of the surplus production, ISMA expects the government would allow exports of 8 million tonnes. The preliminary estimates of sugar production in SS23 stands at 35.5 million tonnes and the consumption is likely to be at 27.5 million tonnes. These are roughly on the same lines as last year. Any adverse regulation by the government for the sugar sector could impact investor sentiments.
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