Steady sugar prices, higher ethanol blending keep manufacturers in a sweet spot 

Notably, government measures on increasing ethanol blending are providing structural change for the sugar industry. More diversion of sugarcane towards ethanol production and blending should help maintain domestic demand-supply balance. The combined effect of the above factors is expected to improve the earnings profile and growth trajectory for the sugar producers. The integrated sugar producers remain best placed.

Sugar production in India touched 11.6 million tonnes (mt) till 31st December’21, as per the Indian Sugar Mills Association (ISMA’s) press release. Uttar Pradesh produced 3.1 mt sugar which was a decline of 22% YoY. While the delayed start of the sugar season has been one reason, it is the higher diversion of sugar for ethanol production that has kept sugar production under check. The higher diversion of sugarcane towards ethanol production is positive for the profitability of the sugar producers as well as taking care of excess sugar production. The sugar season or SS22 had started with an initial estimate (October’21) by ISMA at 30.5 mt (net of 3.4mt on diversion for ethanol production compared to 2.1 mt diversion in SS21. The Sugar season starts from 1st October and ends 30th September. With consumption expected at 25-26 mt, and adding the opening balance of sugar at the start of the year, the surplus could have been bigger if diversion towards ethanol production didn’t take place.

The lower sugar surplus is supporting domestic sugar prices. Domestic sugar prices (Delhi M-30) have remained in the range of ₹36-38/kg since the season began and are higher 4 to 10% YoY since 1st Oct’21 suggests J M Financial Data. Global prices too have remained at $0.18-0.20 per pound in the past 2 months which have helped Indian sugar mills in export contracts, said analysts at J M Financial. India has contracted over 3.8mnt of exports in the current season without any subsidy assistance from the government as the international prices remain firm.

For Sugar manufacturers the positive also is that sugar cane prices have not moved up much. The central government had increased Fair and Remunerative Price (FRP) of sugarcane to ₹290 a quintal, an increase of ₹5 a quintal. The UP SAP (State Advisory Price) also increased by ₹25 a quintal, which was in line with street expectations. The profitability of the manufacturers there was not to see any significant impact.

The rising ethanol production however is providing a bigger trigger and remains the main earnings driver. In 2014, ethanol blending was only 1.5% i.e just 38 Crore litres but today blending has increased to 8% i.e 300 Crore litres in 2021, said analysts at Prabhudas Lilladher. They add that to achieve the 20% blending target by 2025, India will need to produce 10-11 billion litres of ethanol, of which 6-6.5 billion litres will come from sugarcane. As the manufacturers are expected to gain, they are gearing up their capacities to encash the opportunity. Balrampur Chini Mills Ltd is increasing its ethanol capacity by 1.8x to 30 Crore litre, Triveni Engineering & Industries Ltd too is growing its ethanol capacity 1.8 times to 20 crore litre by 2024. Others such as Dwarikesh Sugar Industries, Avadh Sugar and Energy Ltd, Dhampur Sugar mills ltd and Dalmia Bharat Sugar too are not much behind growing capacities 2-3.6 times to 3-10 crore Liters by 2024. This will support earnings growth