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Rise in ethanol price likely to give select players a sugar rush

UP government has written to the centre to increase the MSP to Rupees 34.

, ET Bureau|
Updated: Sep 18, 2018, 09.57 AM IST
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Over the past year, stocks have corrected sharply from their peaks in anticipation of losses stemming from low sugar prices.
Sugar has tasted sweeter after New Delhi announced an increase in ethanol prices. Stocks have been hitting the upper circuit since the announcement, and momentum reversal for the sweeteners is unlikely.

If government support to the industry continues, stocks could also see a re-rating. Incentivisation of ethanol production could turn the highly cyclical industry to almost non-cyclical.

Although the industry will benefit from the expected change in the demand-supply dynamics of sugar that will arise after the ethanol price increases, Dhampur Sugar, Balrampur Chini Mills and Dwarikesh Sugar are likely to be the biggest gainers. Dhampur and Balrampur remain the largest ethanol producers, while Dwarikesh is the lowest cost sugar producer. Further, the companies are expected to see a jump in profits, and are trading below price to book.

Over the past year, stocks have corrected sharply from their peaks in anticipation of losses stemming from low sugar prices. Local retailing rates collapsed from as high as Rupees 37-38 per kg to less than Rupees 30 per kg due to concerns of record high production of 35 million tonnes in FY19, about 9 million tonnes higher than domestic demand.

But the revision in prices for ethanol derived from B heavy molasses (partial sugar cane juice) from Rupees 47.13 to Rupees 52.4 and for ethanol derived from 100 per cent sugarcane juice to Rupees 59.13 from Rupees 47.13 could change the industry dynamics. There is no increase for ethanol produced from C heavy molasses (very less sugar cane juice). Production of sugar may be lower than estimates of 35 million tonnes. Analysts expect next year’s output to be even lower.

This will not only benefit sugar mills with ethanol capacities, but also sugar producers as prices could rise from supply reduction. Currently, there is also a floor price on sugar of Rupees 29 per kg, which can further increase. It is understood that the UP government has written to the centre to increase the MSP to Rupees 34. Cost of production for three-fourths of the mills in UP is estimated at Rupees 33.5-34 per kg.

But for Dwarikesh, it is estimated at Rupees 30-Rupees 31. For Balrampur and Dhampur, it could be closer to Rupees 32.

Dwarikesh may not benefit as much from the ethanol business as its capacity is much lower (30,000 litres per day), but it could benefit from higher sugar prices. Even if the MSP for sugar is not revised, the lowering of supply could lead to sugar prices trending upward.

For Balrampur and Dhampur, ethanol capacities are quite high – expected to be 3.6 million and 4 million litres per day by the end of FY19. Both companies plan to expand further in FY20. Operating margins and return ratios in the ethanol business are much higher.

For instance, in FY178, Dhampur had an operating margin of 19 per cent on ethanol and return on capital employed (ROCE) of 23 per cent. In the sugar business, it saw operating margin of 3 per cent and ROCE of 6 per cent. Operating profit from sugar was Rupees 88 crore and from ethanol Rupees 64 crore.

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