Sugar Rush! Top 4 Sugar Stocks to Watch Out for in 2022

We discussed the top 4 ethanol stocks and how they can help India, which relies heavily on crude oil imports, to power its transportation industry.

This time, we're back with another set of sugar stocks that will enable India meet its ethanol target.

The Indian government in July last year set a target of 20% ethanol blending with petrol by 2025. The government has also set the goal to have 100% ethanol-run vehicles gradually.

Ethanol is alcohol of more than 99% purity. It’s a by-product of sugar mills although it can also be produced from grains or cane juice.

When blended with petrol ethanol helps the engine combust fuel more effectively. This results in lower emissions and pollution.

Since the announcement of India’s ambitious policy to produce ethanol-blended petrol, sugar stocks have been in the spotlight.

In a very recent development, Finance Minister Nirmala Sitharaman in her budget speech, proposed to levy additional excise duty of ₹2 per liter on unblended fuel. The tax will be applicable from 1 October 2022.

This step is expected to boost the ethanol blending of fuel or flex-fuel, which will benefit sugar companies directly.

Let’s look at these top 4 sugar stocks that can benefit from the ethanol program.

1. E.I.D. Parry (India)

EID Parry (India), part of Murugappa Group, is currently engaged in the manufacture and marketing of sugar and bio-products.

The Chennai-based company is a pioneer in the manufacture of plantation white sugar from sugarcane and has been in business for more than 225 years.

The company has 8 sugar factories having a capacity to crush 43,800 tons of cane per day, generate 160 megawatts (MW) of power, and four distilleries with a capacity of 234 kilo liter per day (KLPD). 

In the bio pesticides business, the group offers a unique neem extract, Azadirachtin, having a good demand in the developed countries bio pesticide market.

EID Parry (India) also has a significant presence in farm inputs business through its subsidiary, Coromandel International.

Over the years, the company made their presence felt across the globe by developing tie-ups with various organisations such as Sugarcane Research Institute in Australia, Sugar Processing Research Institute in Louisiana, Tate and Lyle International in UK, and Mitr Phol Sugar Corporation in Thailand.

During the September 2022 quarter, the firm said it will have a capital expenditure (capex) upwards of ₹3.5 bn for current fiscal as well as next year.

For the December 2022 quarter, EID Parry's standalone net profit shrank 95% to ₹180 m, from ₹3.4 bn a year earlier, after a one-time loss from the sale of a unit.

Revenue from operations rose 56% to ₹6.9 bn. The results included an exceptional item of ₹137.3 m as loss on sale of plant and equipment at the Puducherry factory of the holding company.

In a statement, Managing Director of EID Parry, S Suresh said,

The company performed better than the corresponding quarter on account of better realisation and higher volume of exports and alcohol sales.

Firming up of global sugar prices helped in higher exports. The debt reduction measures had helped in reduction of finance cost. Cane crush for the company is expected to be better than the previous sugar year.

The company has delivered good profit growth of 71.2% CAGR over the last 5 years.

 

2. Dalmia Bharat Sugar & Industries

Dalmia Bharat Sugar and Industries has been one of the fastest-growing sugar companies in India.

The total cane crushing capacity of the company is 35,500 tons of cane per day (TCD) which makes it one of the leading sugar producers in the country.

It’s engaged in sugar manufacturing and other related downstream businesses, such as ethanol, co-generation, and distillery.

The company is fully integrated player with 120 MW of co-generation capacity and a distillery of 255 KLPD along with incineration boilers. It also has facilities for processing of raw sugar.

It has five sugar units, of which three are located in the largest sugar producing state of Uttar Pradesh and two are in Maharashtra. It’s the only company in India to have manufacturing facilities in two non-contiguous states in India.

It’s customers include, Coca-Cola, PepsiCo, Mondelez, Perfetti, Britannia, Wal-Mart India, Dabur, D-Mart, India Glycols Allied Blenders & Distillers, United Breweries, Carlsberg, SABMiller, and others.

It also exports to various locations like Indonesia, Malaysia, Bangladesh, Sri Lanka, Nepal, Bhutan, Middle East, Mediterranean countries, East Africa etc.

On Monday, the sugar maker reported a 52.5% increase in consolidated net profit to ₹565.8 m in October-December quarter. Its net profit in the same period a year ago was at ₹371 m.

The board has approved an interim dividend of ₹3 per share of the face value of ₹2 each for 2021-22.

 

3. Triveni Engineering and Industries 

Triveni Engineering & Industries is a focused, growing corporation having core competencies in the areas of sugar and engineering. The company is among the second largest sugar manufacturers in India, and the market leader in its engineering business.

It has four subsidiaries – Triveni Retail Ventures, Upper Bari Generation, Triveni Engineering and Triveni Energy.

It’s engaged in diversified businesses, but mainly in two segments – sugar & allied businesses and engineering.

The sugar & allied businesses primarily comprises manufacture of sugar, co-generation of power and distillation of alcohol.

The engineering business primarily comprises manufacture of steam turbines, high speed gears, gearboxes, and water treatment solutions.

Recently, the company reported robust results. Consolidated profit after tax (PAT) jumped 37% year on year (YoY) to ₹1.3 bn for the December 2022 quarter.

Gross revenue from operations grew 10% YoY at ₹12.4 bn. EBITDA witnessed a growth of 26.4% YoY. Growth was led by firm sugar prices, higher ethanol volumes, and a higher proportion of B-Heavy ethanol.

The management said a broad-based economic recovery already underway is likely to keep the demand strong for engineering businesses.

Triveni has been aggressively diverting sugarcane towards ethanol production in the current season. With the commissioning of a new distillery in March 2022 and brownfield capex in its existing distillery by June 2022, the company will scale up its annual distillery capacity to 22 crore liters.

In the past one year, the stock has zoomed nearly 300% (a four-fold jump). The stock has rallied sharply from its 52-week low of ₹69 to ₹300 per share.

 

 

 

4. Dhampur Sugar Mills

Dhampur Sugar Mills (Dhampur) is one of the leading integrated sugarcane processing companies in India. 

The continuous and often pioneering efforts to harness the full potential of sugarcane has enabled them to expand portfolio beyond sugar to renewable power, fuel ethanol, alcohol, extra neutral alcohol, alcohol based chemicals, and bio fertilizers.

The sugar manufacturer’s integrated facilities are equipped with a cane crushing capacity of 45,500 tones per day. Dhampur has a capacity to produce 1,700 MT per day of refined sugar.

All of its manufacturing facilities are situated in Uttar Pradesh which accounts for more than 50% of India's sugarcane production, the primary raw material for the company.

For the September 2022 quarter, the company’s net profit declined 6.8% to ₹262.5 m in the quarter ended September 2021 against ₹281.6 m during the same quarter a year ago.

Over the period of last one year, the company has reduced its debt.

Moreover, the company has a good dividend track record and has consistently declared dividends for the last 5 years.

The counter has also managed to give multibagger returns to its shareholders in the last 12 months. The sugar producer's share price has surged by 137% in the last one year.

 

Should you bet on ethanol stocks?

Ethanol has been a game changer for the sugar industry.

As diversification into distillery, ethanol, and electricity became possible, most sugar businesses in India are turning into integrated players. This has increased molasses demand.

The Indian government has made ethanol blends in motor vehicle fuels mandatory. This directive has provided sugar mills the opportunity to implement forward integration.

Besides, flex-fuel is also a good solution to address the problem of excess sugar production.

To meet the target of 20% ethanol blending in petrol by 2025, the government has already directed oil CPSEs (Central Public Sector Enterprises) to set up second generation ethanol bio-refineries.

It has also lowered the goods and service tax (GST) on ethanol meant for blending with gasoline from 18% to 5% to curb dependence on imports.

While these reasons are compelling, one must view ethanol stocks with the same amount of caution as one would view other stocks. Ethanol stocks are vulnerable to the cyclical nature of the sugar industry and agro-climatic risks related to cane production.

Further, their profitability remains vulnerable to the policies of the government, domestic and international trade, and pricing.

If you plan to invest, assess the fundamentals and prospects of the business. Sustained research must not be compromised despite the positive odds.

Happy Investing!

 

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com