It has been a roller coaster ride for Sugar stocks this week. The shares of Indian sugar producers witnessed a good rally in the early part of the week – thanks to the Prime Minister’s statement about India having achieved 10 per cent ethanol blending of petrol, almost five months ahead of its schedule and expectation of 20 per cent blending by April 2023.

However, most sugar stocks erased all the gains, on Wednesday, with Triveni Engineering and Industries (6.2 per cent fall to ₹262.40), Shree Renuka Sugars (4.4 per cent fall to ₹51.05) and Balrampur Chini Mills (3.5 per cent decline to ₹397.75) being the prominent losers.

Record output

The correction in the share price of these sugar producers followed reports of an expected record sugar production of 36 million tonnes this year. This is almost 3 per cent higher than the latest estimate of 35 million tonnes. The increase in production is anticipated on the back of higher-than-expected production from Maharashtra and Karnataka. India’s sugar production in the previous sugar season (October 2020- September 2021) was 31.2 million tonnes, according to data released by the Indian Sugar Manufacturers’ Association (ISMA). India is expected to clock a 15 per cent increase in sugar production in the current sugar season – October 2021 to September 2022.

Sugar being a global commodity and India being the second largest sugar cane producer globally, next only to Brazil, higher domestic production can rub off on the global sugar prices. India’s exports are estimated at 9 million tonnes this year. While the surplus production can dampen the sugar prices in the home market in the short term and put some pressure on the global sugar prices, the progress on the ethanol blending program is a long term positive for the industry.  

Ethanol blending

Higher ethanol blending is a win-win for both the Government and sugar manufacturers. For the Government, higher ethanol blending will significantly reduce the crude import bill and higher foreign currency savings. About 80-85 per cent of its petroleum products requirement is met through imports. India’s fuel import bill doubled to about $119 bn in FY22, thanks to the sky-rocketing crude prices. In FY22, India saved about ₹41,000 crore (USD 5.2 billion) in foreign currency on higher ethanol blending.     

For the sugar industry, the benefit will be two-fold. One, higher ethanol sales will help significant improvement in profitability given the higher profit margins in the distillery segment compared to the sugar business. For instance, the margin in distillery segment for Balrampur Chini Mills, a leading private sector sugar manufacturer, was over 41 per cent in FY22. This compares to a 6.2 per cent margin in its sugar segment.

Second, higher ethanol production will also support sugar prices, as there will be a reduction in sugar production due to the diversion of sugar cane juice and B-Heavy molasses for ethanol.

Besides the Government and sugar industry, oil marketing companies (OMCs) will also benefit from higher blending as they will save on the additional duty on unblended fuels, which was about ₹2 per litre and had to be absorbed fully by OMCs.

The Government, having achieved a 10 per cent blending target ahead of its deadline, has raised the hopes of petrol pumps selling 20 per cent ethanol-blended petrol sooner than April 2023. Sugar manufacturers have already commenced investments to increase their distillery capacity to cater to the incremental ethanol demand. This will go a long way in changing the dynamics of the Sugar industry by lending more stability to their operations.