Volume, realisations likely to drive gains for sugar companies' stocks

The sugar industry had flat production year-on-year (Y-o-Y) in the fourth quarter of 2024-25 (Q4FY25) at around 6.8 million tonnes. But higher realisations per tonne could drive March quarter results. The government allowed export of 1 million tonnes which was a boost. The industry enjoyed an up to 10 per cent increase in ex-mill prices and prices may stay firm going into off-season with overall production falling 18 per cent to 26 million tonnes (post diversions) until March 31.

 

The National Federation of Cooperative Sugar Factories (NFCSF) expects pan-India sugar production to reduce 19 per cent to 26 million tonnes (post diversion to ethanol), due to a 25 per cent decline in sugar production in Maharashtra and a 10 per cent drop in Uttar Pradesh (UP). 

 

The production estimate has been revised downwards from earlier estimates. Cane crushing was lower across key states of Maharashtra, Karnataka, and UP, leading to an 11 per cent decline in pan-India cane crushing volume to 265.3 million tonnes until March 31. 

 

The aggregate recovery rate of sugar from cane crushing is around 9.4 per cent which is around 78 basis points (bps) contraction Y-o-Y.

 

Ethanol blending volume grew 66 per cent Y-o-Y to 1.6 billion litres for January and February cumulatively, and the current blending rate is in the range of 19.5-20 per cent. A large part of incremental growth in ethanol volume has come from grain-based ethanol.

 

The government is considering increasing the blending rate from the current target of 20 per cent to 25 per cent or more and this could be good news for the sector. There has been no upward revision in prices for ethanol from B-(heavy and juice routes), hence distillery margins will be flat or lower in Q4FY25 due to higher input costs.

 

Balrampur will benefit from higher volume and higher sugar profitability. Distillery realisation is expected to be flat at about ₹57.7 per kg but sales will climb quarter-on-quarter (Q-o-Q) after a weak Q3FY25 for ethanol offtake. A recent move to allow the use of rice for ethanol production will also boost distillery capacity utilisation for mills. 

 

Overall profitability for sugar players may improve, due to improvement in realisations per tonne, apparent resumption of volume growth, and better operating leverage for distillery businesses. Domestic sugar prices have risen between 6 and 10 per cent. Polylactic acid (PLA) prices are also holding firm, which is a good sign for forward-integrated units like Balrampur.

 

The closing inventory forecast at end of season is at 5 million tonnes compared to 8 million tonnes in the prior season. Assuming demand stays level, this means good realisations. A hike is also anticipated in the minimum support price (MSP) for sugar from the current ₹31 per kg to ₹35 per kg or higher. 

 

Lower production in India invariably leads to higher global prices due to India being one of the largest producers. The weak rupee also makes exports more attractive if policy permits.

 

This situation of stable demand, higher global prices, lower production, etc., is likely to boost operating profit margins in Q4FY25. Downstream diversification into PLA will potentially also lead to higher valuations for mills.

 

Among big players, Balrampur (East UP) is expected to do well with a consolidated revenue of ₹1,570 crore in Q4FY25 versus ₹1,430 crore in Q4FY24 (up 10 per cent), primarily driven by an increase in realisation and volume in sugar and distillery and assuming 7-7.5 per cent improvement Y-o-Y in sugar realisations. 

 

Consolidated operating profit margin is expected to be 25 per cent-plus versus 24 per cent in Q4FY24. Net profit could rise by around 15-16 per cent Y-o-Y.

 

Triveni Engineering (West UP) may see consolidated revenue up by 12.5 per cent Y-o-Y to ₹1,460 crore due to higher volume and realisation. Operating profit margin is expected to reach 22.1 per cent, gaining around 300 bps Y-o-Y. However, channel checks suggest “red rot” fungal infections with cane in West UP which could be a dampener.