These ethanol-oriented sugar stocks are under pressure after govt curbs

The government has said no ethanol from sugarcane juice and B-heavy molasses will be procured by oil marketing companies (OMCs) with immediate effect

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Shares of sugar and ethanol manufacturers like Balrampur Chini Mills, Dalmia Bharat Sugar, Shree Renuka Sugars, and Triveni Engineering declined up to 3 percent on December 7 following India’s plan to curb ethanol production from sugarcane as it battles sugar shortage in domestic market.

In the past one week, shares of Balrampur Chini Mills, Dalmia Bharat Sugar, Shree Renuka Sugars, and Triveni Engineering have declined in the range of 1 percent to 8 percent, while ethanol-plant manufacturer Praj Industries gained 1 percent, showed data. In comparison, the S&P BSE Sensex surged 4 percent during the same period.

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According to Department of Food and Public Distribution Record of Decisions, no ethanol from sugarcane juice and B-heavy molasses will be procured by oil marketing companies (OMCs) with immediate effect. However, ethanol from C-heavy molasses will be encouraged, the notification from December 5 read.

“The diversion into ethanol has been quite meaningful over past quarters and margin accretive for sugar companies. The government’s ethanol clampdown may increase sugar production solely but the core output has been not been as lucrative as ethanol diversion. Most of the consistent run-up seen across sugar stocks was on the back of the money made through ethanol diversification. Even in ethanol scheme of things, distributed ethanol also supported earnings of suagr companies. Any such development does not augur well for sugar companies as there will be slowdown in ethanol procurement from OMCs and will face an impact on its margins,” told Nirav Karkera, head of research, Fisdom.

Several sugar companies rely on ethanol production for a significant share of their earnings.

Praj Industries, for instance, has a strong leadership in manufacturing domestic ethanol plants in India, commanding about 60-65 percent market share. In the September-ended quarter of fiscal year 2023-24, the company generated 75 percent of its income from the bio-energy segment.

Another ethanol manufacturer Balrampur Chini, too, will grab investors’ attention as the company recently expanded its ethanol production by 50 percent to nearly 30 crore litres this season between November and April. “Our goal is to strike balance between sugar and ethanol production to maximise profitability and ensure sustainable growth,” the management said recently.

On the other hand, Shree Renuka Sugars distillery produced around 6.6 crore litres of ethanol in the first half of fiscal year (FY24), wherein it sees that ethanol may contribute 40 percent of the firm’s revenue.

The government move to curb ethanol production using sugarcane has come after erratic monsoon in India harmed sugarcane crops, prompting India – the world’s second biggest sugar producer to extend restrictions on exports beyond October 31.

In recent years, sugar stocks have been riding high on surging ethanol demand from Indian oil companies to meet the 20 percent blending target in transport fuel by 2025. If the government diverts supply from ethanol units, analysts believe that target will be at risk.

The government’s move may come as a setback for the sugar industry which has invested crores of rupees in the last five years to increase ethanol production capacity.

As per Indian Sugar Mills Association, a producers’ body, said that sugar production is likely to fall 8 percent to 33.7 million metric tons in the 2023/24 marketing year.

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