Strong earnings growth ahead for listed sugar companies' stocks

Sugar stocks went up sharply on Friday on the news of a major policy change on ethanol as the industry gears up for the next crushing season. In December 2023, a cap was imposed on the quantum of sugar that could be diverted to produce ethanol to prevent a squeeze in sugar supplies ahead of the elections.

That cap has now been removed for the period November 1, 2024-October 31, 2025, which means sugar mills can fully exploit the opportunity for ethanol blending with petrol.

The notification allows sugar mills and distilleries to produce ethanol from sugarcane juice/sugar syrup, B-Heavy molasses, and C-Heavy molasses, as per their agreements with oil marketing companies.

The blend ratio targeted is 20 per cent (80 per cent petrol with 20 per cent ethanol) for Nov '24-Oct '25, up from an estimated 14 per cent in Nov '23-Oct 24. The 20 per cent blend target will lead to an estimated demand for 9 billion (bn) litres of ethanol from the OMCs - one tonne of sugar can produce around one billion litres of ethanol.

This move will mop up inventory sugar, supporting the profitability of sugar mills and enabling timely payment to farmers. Moreover, ethanol producers (including sugar mills) may procure rice from FCI to a limit of 2.3 million tonnes (mt) to support alcohol production.

Sugar inventory levels are expected to be around 8.5 mt going into the crushing season as of October 2024, which is well over than the minimum inventory requirement of 5 mt.

Further, gross sugar production is expected to remain at 32 mt in the upcoming season, higher than expected consumption of 29 mt. This implies over 5 mt of sugar is surplus to consumption and inventory, and can be utilised for ethanol.

Given diversions of 4-5 mt of sugar equivalent to ethanol, which would be sufficient for 4.5 to 5.0 bn litres of ethanol production.

The removal of the cap will enable sugar companies to fully utilise distillery capacity, given they can also utilise rice and grain. The cap resulted in distillery capacity utilisation only at 60-70 per cent last season. It's estimated that total ethanol production capacity is close to 13-14 bn litres (including molasses and grain-based), which can easily produce 9 bn litres of ethanol for blending, apart from supplying ethanol to other industries. The easing of procurement of FCI rice, combined with the removal of the sugar cap, will also enable a higher margin (10-12 per cent at the operating level) for grain ethanol.

The policy clarity on ethanol blending and the likelihood of high or full utilisation of distillery capacity by sugar mills paves the way for strong earnings growth from Q3FY25 onwards. This has led to the sector re-rating which has led to the shares shooting up. Analysts may be looking at valuations in the range of 15-20 times price to earnings for various sugar companies.

Large sugar companies will do better. Balrampur Chini may produce 320 mn litres of ethanol in FY26 through its distillery operations and higher sugarcane crushing in the next season. Triveni Engineering will also see higher sugarcane crushing and the company acquired one plant in western UP in 2023. Triveni Engineering may produce 220 mn litres in FY26. Dalmia Bharat Sugar would also be able to utilise its grain distillery to produce around 220 mn litres.