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BL Research Bureau

Sugar stocks have surged sharply on Wednesday’s trading, reacting to the Finance Minister’s statement suggesting that the sugar sector may receive policy sops. Mandatory 5 per cent ethanol blending in fuel, a continuation of export subsidy to mills and extended moratorium on loans extended to the sector, have been some of the reported sops.

However, moves between 8 and 18 per cent in sugar stocks in response to the announcement appear to be exaggerated, as the earnings benefits from these policy changes may accrue only to a few players and that too, only over a one-two year time frame.

The extension of export subsidy and the moratorium on loans may both have negligible benefits for the listed private sugar mills. In the past, mills, anxious to reduce their surplus inventories have had to pass on export subsidies to their global buyers. Any sops relating to an extended moratorium on loans is likely to benefit ailing co-operative sugar mills rather than the listed private sugar companies.

Mandatory 5 per cent ethanol blending in fuel(likely to be increased to 10 per cent later), could open up additional revenue streams for sugar producers, as offtake of ethanol by oil companies could improve.

However, only players with substantial ethanol capacities such as EID Parry, Balrampur Chini Mills, Shree Renuka Sugars and Bajaj Hindusthan may be able to capitalise on this. As ethanol supplies are negotiated at a fixed price, the ability of mills to contain their cane procurement costs will also be crucial.

On this aspect, sugar companies situated in Uttar Pradesh may be able to reap healthy margins from ethanol sales, only if they manage to negotiate lower cane prices. In the meantime, with sugar production estimates for the current season pointing to significant surplus, realisations and margins from the core sugar operations may continue to be under pressure.

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