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BL Research Bureau

Sugar stocks have notched up sharp gains over the past week on expected policy changes relating to the sector. But the gains appear to be overdone, at least for the smaller sugar producers.

Policy changes enabling a direct conversion of sugarcane into ethanol and higher proportion of mandatory ethanol blending are the key sops being expected.

However, there has been no formal announcement yet and even if these changes do materialise, they may benefit only a select few. A relaxation in policy that allows direct conversion of cane into ethanol would certainly help reduce sugar inventories in the surplus years of the sugar cycle, such as the one we are entering now.

But whether ethanol turns out to be a money-spinner for sugar mills would depend on several factors.

For one, offtake of ethanol by oil companies should stage an improvement from current levels; even at the current 5 per cent blending norms, the actual offtake has been well below targets. Second, sugar mills should be allowed greater flexibility in the pricing of the cane procured.

With cane procurement prices now subject to statutory minimum limits, sugar mills cannot offer ethanol at completely market-determined prices, capping the margins from ethanol sales.

Finally, only the large and integrated sugar mills may be in a position to switch freely between sugar and ethanol to take advantage of ups and downs in the sugar/ethanol cycle. These players may also be the best placed to weather the current downturn in domestic sugar prices, which appears likely to last awhile.

In light of these factors, benefits from any policy changes may be restricted to large integrated sugar companies such as Shree Renuka Sugars, Balrampur Chini Mills, EID Parry and Bajaj Hindusthan.

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