Expect ethanol manufacturing to attract over Rs 130-bn investments: Sawhney

We expect a number of new distilleries to come up in the next two-four years' time, said Tarun Sawhney

Shares of sugar companies have rallied as much as 50 per cent in a week after the government decided to increase ethanol price by 25 per cent. Can the celebrations last for long? Tarun Sawhney, vice chairman and managing director at leading sugar maker Triveni Engineering and Industries, which owns seven sugar mills, tells Ajay Modi the decision will give birth to a new industry and in next two-four years, substantial revenue of sugar companies will come from ethanol. Excerpts of the interaction:

Tell us about the impact of last week’s decision on the sector?

We expect a number of new distilleries to come up in the next two-four years’ time. It is said that there have been 200 new applications submitted for setting up distilleries. The next important thing for the governments, especially in states is to ensure that movement of molasses (the raw material) and ethanol is allowed freely within the state and between the states. The sector needs an ease of doing business.

What kind of investments could the distillery segment attract? What is the revenue potential?

Conservatively, even if half of the 200 applications move forward and culminate in actual setting up of capacities, the numbers could be huge. Setting up a distillery with a 100 kilolitre per day (klpd) capacity can cost Rs 1.3 billion on an average including the land. So, a hundred distillery means an investment of Rs 130 billion. Given the current ethanol price, one distillery of hundred klpd could easily generate annual revenue of Rs 1.5 billion and a hundred such distilleries can generate revenue of Rs 150 billion. Each such distillery will create 250 direct jobs in rural areas and the total job creation can be 25,000. It is literally the birth of a new industry. One can expect a re-rating of sugar shares in a couple of years.

What per cent of Triveni's revenue now comes from distillery segment? How can it change? How are banks looking at this business considering they have been wary of the sugar business?

We currently get about 10 per cent revenue from the distillery business and it can easily double in the next few years. We are already investing Rs 2 billion in a new distillery and in the modification of old capacities. The banks are excited about lending to the project.

Can this one announcement and the renewed focus on ethanol blending change the economics of the ailing sugar industry?

This is a bold step and it means a lot to the industry. However, I do not think that it will be a panacea for all the issues that we face year after year. Look at the pricing of sugarcane, the raw material for both sugar as well as ethanol. We continue to seek a solution to this illogical pricing mechanism so that we can have flexibility in conversion of sugarcane into sugar or ethanol based on pure financials.  

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Do you think there will be a competition between other consumers of molasses-based alcohol like liquor or chemical industry and ethanol for raw material?

I do not think so. Most liquor producers are moving to the grain-based manufacturing of alcohol while the chemical industry is increasingly petroleum based.  

Do you see the entry of non-sugar players into this segment?

Yes, I see the entry of new players including those outside the sugar industry. It is good for the sector. The advantage of a sugar mill is that it has its own raw material that does not need transportation and the associated cost.

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It was in 2006 that the country first experimented with ethanol blending but could never sustain the exercise. What is the learning?

Like every commodity, ethanol is driven by pricing and a low pricing was the only reason. You cannot expect investments in ethanol capacities without a remunerative price.

While the ethanol decision will have its impact gradually, how will the industry manage the unprecedented sugar surplus?

Export is the only solution. It can only materialise with a bold push from the government. The gap between the domestic and international price is substantial and export is unviable. I believe the subject is under active consideration of the government and some decision can be expected soon.