SUGAR TURNING INTO WHITE GOLD
Indian Economy & Market|September 2021
Sugar sector, for long, has always been considered as cyclical in nature. Nevertheless, some structural change that is taking place now makes it a sustainable business and reduces the cyclicality.
Krishna Kumar Mishra

Recently global sugar prices have crossed US cents 20 per pound from a low of US cents 10 per pound one year back and more importantly domestic prices are following global price trend and moved to a four-year high of Rs 34 per kg in Maharashtra and Rs 36 per kg in Uttar Pradesh. The impact of this on share prices of sugar companies is substantial. Year till date most of the sugar companies shares have doubled in their values and some of them have even seen an increase by three fold.

Most old-time investors, who have seen many market cycles, might see this as another sugar cycle. They may also think that it will reverse soon. Their point of view has a reason behind it. They are still under impression that sugar is a highly regulated, cyclical commodity with greater degree of local level of politics. All these factors have led to sugar stocks being under-owned in one’s portfolio.

Sugar economy improving

Nevertheless, we believe that the current change in the landscape of sugar sector is structural and will have far reaching consequences on the entire sector. Factors such as improving sugar prices, government measures and higher distillery capex to leverage ethanol opportunity will help to sustain the current momentum in sugar companies.

Massive distillery Capex to leverage ethanol opportunity

In June 2021, the government released a roadmap for ethanol blending programme, which clearly set forth ethanol capacity requirement, raw material availability, planned storage capacity by oil marketing companies (OMCs) and change in engine, components requirement among other important factors. We believe this depicts the government’s seriousness in implementing the programme. With the increasing molasses and grain based ethanol capacities, 10 per cent and 20 per cent ethanol blending by 2022 and 2025, respectively, is achievable. Out of the total requirement of 1350 crore litre (ethanol & Extra Neutral Alcohol) by 2025, sugarcane-based ethanol is expected to contributes 684 crore litre while grain based ethanol would contribute 666 crore litre.

According to an estimate by a leading brokerage firm, ethanol blending at 20 per cent would create massive 1000 crore litre of annual ethanol demand every year by 2025. Currently, OMCs are procuring around 300 crore litre (nine per cent out of this is grain based ethanol). With the huge opportunity in the ethanol space, sugar & other agri-based companies are undertaking huge capacity expansions.

The sugar industry has added around 100 crore litre of distillery capacity in the last two years. Moreover, another around 300 crore litre of capacity would be commissioned in the next three years.

Currently, B-heavy & sugarcane-juice ethanol prices are far more remunerative compared to C-Heavy ethanol prices. We believe sugar companies would divert almost 75-80% of their sugarcane towards B-Heavy ethanol & 5-10 per cent towards sugarcane juice ethanol. C-heavy ethanol/ENA would only be produced for mandatory levy requirement for country liquor in Uttar Pradesh. This would result in 20 per cent or 6 million tonnes sugar diversion towards ethanol production, which would absorb the entire excess sugar production.

The process on the ethanol front is progressing on expected lines. The current blending levels are closer to 8.5 per cent while OMCs have contracted to procure 318 crore litre of ethanol between December 2020 and November 2021. We believe ethanol blending would cross 10 per cent by November 2022 given sugar companies are increasing distillery capacity 2-3x in the next two years. With the commissioning of massive distillery capacity by November 2022, blending levels would reach 20 per cent levels by 2025.

The capex would result in 15-40 per cent earning CAGR for sugar companies during FY21-24E. Moreover, distillery segment (ethanol, ENA) would start contributing more than 25 per cent to revenues. We believe earnings of sugar companies have become much more stable compared to pre-2018 period.

Higher Global Sugar Prices to Promote exports

Global sugar prices have moved up 50 per cent in last one year on the back of two consecutive years of lower sugar production by Thailand (major sugar exporter). Moreover, despite on-going Brazilian crushing season, sugar prices have been firm considering expected 5-6 MT sugar production decline due to severe drought & crop destruction due to frost in many areas in south central Brazil. We expect global sugar prices to move up higher in the next one year, which would help the Indian sugar exports to the tune of 6 MT in 2021-22 season. Sugar exports are important given industry wise distillery capacities would take two years to get commissioned.

MSP for Sugar has Curbed losses during Periods of Surplus

In the earlier sugar surplus cycle of 2015, domestic sugar prices corrected sharply – to a low of Rs 22 per kg from Rs 32 per kg – with an increase in sugar inventory to 9.1mn tonnes in September 2015 from 6.7mn tonnes in the previous season.

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