Sugar Stocks Rise As Analysts Remain Bullish On The Sector
Here’s what analysts have to say...
Sugar stocks rose as analysts remained bullish on the sector, citing India's focus on ethanol-blending, incentives and pricing of the biofuel.
Shares of sugar processors Balrampur Chini Mills Ltd. and Dhampur Sugar Mills Ltd. gained as much as 2.58% and 3.34%, respectively, while Shree Renuka Sugars Ltd. hit the upper circuit on surging 9.85% on Wednesday. Dwarikesh Sugar Industries Ltd. and Avadh Sugar & Energy Ltd. gained as much as 6.1% and 4%.
India advanced its target to reach 20% ethanol blending with petrol second time in a year. It now plans to reach the level two years earlier by 2023, after having advanced it by five years in January to 2025.
Production of ethanol would facilitate diversion of excess sugarcane and sugar to ethanol, helping mills to deal with surplus stocks. It would enhance income of farmers as setting up of new distilleries would not only increase demand of their crops but also assure them of getting better price for their crops, according to a government statement. Besides, with increase in blending levels, dependence on imported fossil fuel will decrease and will reduce air pollution, it said.
Besides ethanol-blending, high exports for the second sugar season amid a global supply crunch, too, lifted the sentiments of analysts.
Here’s what analysts have to say:
Crisil
High sugar exports for the second sugar season in a row, coupled with increased supplies of ethanol for blending with petrol, will improve the operating profitability of integrated sugar mills by 75-100 basis points to 13-14%.
In a bid to enhance the ethanol-petrol blend mix, sugar mills are being incentivised by the government to supply ethanol to oil marketing companies. This is reflected in a consecutive rise in procurement price for ethanol.
About 2 million tonnes sugar production is expected to be diverted for manufacture of ethanol in the current sugar season.
Continuation of incentives and soft loans for ethanol, and progress on changes in automobile engine for higher blending will remain monitorable and decide pace of further capacity addition in ethanol.
Care Ratings
With tight global demand-supply scenario, favourable policies, exports, and ethanol blending doing their bit in rationalising the inventory levels in India, the sector is on track with its transformational plan.
With considerable increase in ethanol sales and demand-supply balance evening out, integrated sugar mills are expected to witness sustained increase in their cash flows going ahead.
Running on the highly remunerative global prices, the industry is all set to meet its export target of 6 million tonnes in this sugar season.
Furthermore, with the expected dip in the Brazilian production due to poor cane crop and reduced crushing capacity in that country, the export dynamics are expected to prevail over the next sugar season as well.
With ethanol blending by oil marketing companies picking up pace and with the government’s stance on increasing the blending targets to 20% supported by the remunerative ethanol pricing and incentive schemes, the economics of sugar industry are getting better.
India has a lot of untapped potential in ethanol — It has only around 2% share in the global production of ethanol, while it has close to 17% share in global sugar production.
JM Financial
Remains positive on the sector from cash flow perspective and Balrampur Chini is the brokerage’s top pick.
The government’s focus on the ethanol blending programme, coupled with policies like minimum support price, monthly release order mechanism, ethanol pricing etc. that ensure survival of the weakest mill, also augur well for well-managed sugar companies like Balrampur Chini.
Key risk to stocks: Higher-than-expected hike in state advisory price for sugarcane for UP mills for 2021-22 season.