Higher ethanol prices, procurement can boost sugar sector's prospects

Increase in minimum price of cane and export policy in new sugar season are also crucial to drive earnings

Expectations of a hike in both ethanol procurement prices and quantity has left sugar stocks buzzing. Balrampur Chini, Dwarikesh Sugar, and others gained 5 per cent or more on Thursday, with some going up on Friday as well.

This hike holds importance for sugar producers as it helps them divert excess sugar production. Moreover, ethanol is more profitable. Notably, the expected per-litre hike of Rs 2.5-3.0 is more than up to Rs 1 seen in the past few years.

Higher procurement will help mills at a crucial time, given that sugar production in the current sugar season (SS 2020-21) is expected to be significantly high. The sugar season is from October to September. The Indian Sugar Mill Association (ISMA) estimates closing inventory of 10.7 million tonnes (MT) at the end of the previous sugar season, which ended on September 30, 2020. Also, the new SS is expected to see production of 30.5 MT, as against 25-26 MT sugar consumption, which will increase surplus further. Ethanol sales also generate faster returns for manufacturers, as they get payments within 15-20 days, compared to over 12 months for sugar sales. This is expected to improve cash flows and reduce working capital.

The ethanol procurement year usually starts from December. Companies are likely to have diverted 0.8 MT of sugar production towards ethanol during the last season, which may be lower than the target, as cane acreage was lower in Maharashtra and Karnataka. In the new procurement season, the industry can easily divert 1.5-2 MT towards ethanol production, feels Abhinash Verma, director general, ISMA. This can bring respite and boost profits. It is expected that up to 2.5 MT of sugar production can get diverted for ethanol production.

Meanwhile, all eyes will also be on the expected hike in the minimum support price (MSP) for sugar, which is hovering around Rs 31 per kg. The fair remunerative price for sugarcane has already been hiked to Rs 285 per quintal for SS 2020-21, from the earlier Rs 275. Therefore, per-kilogram cost of producing sugar is expected to increase to Rs 33.5 in SS 2020-21, from Rs 32.4 earlier, says CARE Ratings. Thus, companies are hoping for a higher MSP.

Further, while sugar exports are expected to be at a high of 5.8 MT for the last season, export policy for the new season is awaited. India Ratings observed that sugar has bucked the trend on record exports, but MSP hikes hold the key to profitability in the second half of FY21.

Verma, too, feels that both the MSP hike and export program hold key to sugar producers' prospects. Among companies, Balrampur Chini Mills remains the top pick of brokerages due to its strong balance sheet, aggressive export strategy, and expanded ethanol capacity.