Why Dhampur Sugar To Triveni Are On Track To Reap Better Margins
Shares of Indian sugar companies have surged in anticipation of higher exports as Brazil, the world’s biggest producer of the sweetener, is likely to see output fall yet again.
Initial trends from Brazil’s harvest season suggest a lower cane yield due to drought conditions. That would make the global shortage worse, and prices have already started rising. For local sugar producers, that means better margins when domestic demand is on the rise, exports are higher and ethanol blending is increasing.
Most sugar stocks are closing in on 52-week highs, having surged 19-104% in the last three months.
A Global Deficit
Sugar production in Brazil’s center-south in April totaled nearly 2.2 million tonnes, a 28.5% drop over a year earlier, S&P Global Platts said citing data from the sugarcane association of Brazil. This comes after the South American nation’s output fell to its lowest in 14 years in the 2019-2020 sugar season.
Output also declined in Thailand, one of the largest producers, because of a poor monsoon.
Meanwhile, China’s imports surged as it slashed import duty on the sweetener from 95% to 50% in 2020. Imports by the world’s second biggest economy, according to a report released by its Agriculture Ministry, will continue to rise over next 10 years at 5.8% to hit 5.6 million tonnes by 2030.
The International Sugar Organization has forecast a deficit of around 3.5 million tonnes in 2021. The inter-government body had previously forecast a much smaller deficit of 0.74 million tonnes for the current season.
The ongoing October 2020 to September 2021 sugar season will see India export the commodity for the third straight year. That includes additional 3,675-tonne export to U.K. under the concessional duty quota. And India increased export quota as the output is likely to rise 15% this season after declining in 2019-2020.
“Sugar exporters will be able to meet the government’s target of shipping 6 million tonnes this year, the highest since 2010-11 even as a surge in virus cases slowed down local movement of the sweetener,” Adhir Jha, chief executive officer and managing director at Indian Sugar Exim Corp., said in an interview to Bloomberg.
India’s mills have already contracted to ship as much as 5 million tonnes as part of the 2020-21 quota, helped by rising demand in Indonesia and Afghanistan, according to Rahil Shaikh, managing director at Meir Commodities India Pvt. So far, India has shipped 3.3 million tonnes (nearly 55% of the quota) by the first week of April and another 1 million tonnes is expected to be exported by the end of May or early-June, he said.
India also allowed oil retailers to sell ethanol as a standalone fuel and approved making ethanol from cane juice. And Uttar Pradesh’s decision to keep state advisory price aided sentiment.
The biggest push comes from India’s plan to increase ethanol blending with auto fuels. In the ongoing season, sugar producers have committed to supply 3.5 billion litres of ethanol to oil retailer, increasing average blending to 8.3-8.5%. India targets 20% blending by 2025. That, Sugar Manufacturers’ Association estimates, will eliminate yearly surplus by 2023.
According to JM Financial, global sugar prices have firmed up on expectation of higher diversion to ethanol in Brazil, and a decline in output decline in Thailand and Australia. Raw sugar futures reached a four-year high of 18.25 cents a pound this week, according to Bloomberg data. That price, according to Tropical Research Services, may prompt India to export more without subsidy this year.
Domestic prices rose to Rs 33-34 a kilogram in April, after remaining stagnant around Rs 30-31, underscoring higher summer demand. Motilal Oswal sees prices sustaining at higher levels.
Crisil Research estimates that the Rs 3,500 crore export subsidy, stable domestic demand, and a higher diversion and rising prices of ethanol could:
- Increase operating margins of sugar mills by 100-200 basis points to 10.5-11.5% on average for the financial year 2021.
- And further expand by 100 basis points to 12.5% in FY22 for integrated sugar mills companies because of the rising share of B-heavy ethanol, a variant whose prices have risen the most.
According to the investor presentation of Dhampur Sugar Mills Ltd.:
- The basic price of ethanol derived from C-heavy molasses rose Rs 1.94 a litre to Rs 45.69 for December 2020 to November 2021 supply period.
- For ethanol derived from cane juice, the price rose Rs 3.17 to Rs 62.65 a litre (ex-mill).
- B-heavy molasses turned costlier by Rs 3.34 to Rs 57.61 a litre.
Crisil estimates rising prices to make exports viable even in the absence of a subsidy from the government. India recently reduced the subsidy from Rs 6 a kilo to Rs for the sugar season 2020-21, with prospective effect.
In all, Crisil said the industry’s debt metrics are likely to improve on better profitability and lower working capital requirements as inventory levels decline.
Rakesh Arora, commodity expert and managing partner at Go India Advisors, sees multiple re-rating triggers for the industry, encouraged by ethanol push and potential deleveraging. While Avadh Sugar & Energy Ltd. offers value, he considers Dhampur, Balrampur Chini Mills Ltd. and Triveni Group better bets because of their higher ethanol capacity.