Sugar outlook turn sweeter on prospects of higher prices due to less rain

News reports that deficient rainfall leading to shortfalls in sugarcane production as the crushing season gets underway caused some concerns. This coincided with a sharp rise in sugar prices and rumours that the government would be looking at policy measures to prevent hoarding and prevent price-gouging, etc., by using the release mechanism, export controls, and so on. There could also be impacts on the ethanol and ethanol-blending industries.  

Apart from financial implications, sugar is of political importance. It’s a basic commodity which generates a lot of employment in agrarian districts in several states including Uttar Pradesh, Tamil Nadu, Karnataka and Maharashtra. 

Sugar is the most highly controlled commodity in the Consumer Food Price Index (CFPI) basket (all other nine items have already spiked sharply). The price mills must pay for sugarcane has been hiked by 3-4 per cent to Rs 315 per quintal (1 quintal =100 kg).

The ISMA (Indian Sugar Mills Association) forecasts production of 31.7 million tonnes (MT) of sugar (post ethanol diversion) and consumption of 27.5 MT in the 2023-24 financial year (FY24), leaving a surplus of 3-4 MT. The post-ethanol production was 33 MT in the last season and 36 MT in the season before it. Sugar season starts in October and ends in September. 

The opening inventory is 6.2 MT, which translates into 2-3 months of consumption, and therefore should be enough. But fears of a price spike may lead to export controls. International prices for sugar are ranging at equivalent of Rs 44-46 per kg whereas domestic prices are Rs 37-38 per kg (Sept 2023), up from Rs 34 per kg (July 2023). But exports may be controlled to 6 MT, which has already been exhausted – exports were around 11 MT in the last season.  

Oil marketing companies (OMCs) have hiked the ethanol price for blending by an average of Rs 3.71 per litre to around Rs 64-66 per litre if produced from damaged grains (broken rice and maize) to compensate distilleries which are sourcing damaged grains that are no longer being subsidised by the Food Corporation of India (FCI). 

This hike is good for sugar companies since the OMCs already offer around Rs 65-66 for ethanol from sugar and hence, the price of the competing product has been equalised. Policymakers are targeting 12 per cent blending by 2024 and 20 per cent by 2025 and the price hikes indicate the commitment. 

Hence, there is optimism for higher realisation for sugar stocks which produce ethanol and the payoffs for higher distillation capacity will be good. Mills with significant ethanol capacity will probably be able to maintain or increase their earnings before interest, tax, depreciation and amortization (Ebitda) margins under this scenario but it would be hard for mills without ethanol capacity to compensate for lower exports. 

A company like Balrampur Chini which has recently doubled its distillery capacity to 350 million litres should, for example, clock 40 per cent growth in Ebitda and profit after tax over FY23-25. This could translate into a 20 per cent upside in valuations.