Sugar Stock Falls By 17% This Week On Restriction In Ethanol Production; Buy-On-Dips Opportunity?

Just like every other sugar stock, Balrampur Chini Mills had a tough week with its share price nosediving by more than 16%. The reason behind the selling pressure comes after the government banned the usage of sugarcane juice and sugar syrup for ethanol production for the supply year FY24. The move is to ensure the availability of sugar on a domestic level and keep prices in control.

But that led to a massive bearish tone in sugar stocks. Balrampur Chini also dived by over 16.7% on BSE. On Friday, the stock ended at Rs 392.65 apiece, down by 3.86% on the exchange with a market cap of Rs 8,011.63 crore.

In its research note, JM Financial pointed out that the outlook for India's sugar production for the current crushing season (Oct' 23-Sep '24) is uncertain.

As per the brokerage, in August month, the Indian Sugar Mills Association (ISMA) had put out a preliminary sugar production (net) estimate of 31.7mnt for SS24 (Oct'23-Sep'24). However, Aug'23 has been a dry period across the nation, particularly in the states of Maharashtra and Karnataka (these two states account for 45-50% of India's production), leading to the emerging risk of a further cut in production estimates (on account of yield/higher diversion as cattle feed).

The brokerage estimates India's sugar production (net production, post diversion of 4.5mnt) of c.30mnt for SS24E. It also took note that UP, despite seeing dry weather in Aug, doesn't get impacted in the monsoon given significant irrigation, thanks to crisscrossing rivers in the state.

Against this backdrop, JM Financial cited that the Government of India (GoI) has notified that -- a) sugar companies should not divert sugar for ethanol from juice for the current Ethanol Supply Year (ESY2023-24), and b) there should be no incremental ethanol supply contracts from B molasses (apart from those already contracted).

JM believes this is expected to result in a net supply addition of 2-3mnt of sugar vis-à-vis earlier estimates (c.29mnt), thus cushioning the domestic market from any unpleasant shock (consumption of 28.5-29mnt).

While this does imply a change of course for the sugar industry (given the significant push to ethanol blending by the government in the past 4-5 years), JM's note said, "We believe the measure is temporary (caused by a fall in sugar output in Maharashtra and Karnataka due to
water scarcity) and will be reversed once there is an oversupply scenario again."

However, the brokerage's calculations suggest that these measures will not materially impact Balrampur Chini's bottom line (its estimate cut by 5-7%, largely on higher cane price assumption) as lower distillery volume (juice-based ethanol) will be offset by a) higher sugar sales/profits, b) higher C molasses-based ethanol volume (more profitable on per ltr basis), and c) higher average sugar realisation (given a tighter demand-supply scenario).

JM believes that the situation does appear to be challenging in the near term for sugar companies in India, particularly on account of lower distillery volumes and perceived control of sugar prices.

However, it added, "We believe BRCM is well placed to tide over this on the back of a) excellent cane development management initiatives (seeing a significant increase in sugarcane crushing volume vs. sharp decline in volumes for peers in Maharashtra and Karnataka), b) optimal integration (providing flexibility to switch on/switch off on ethanol volumes, c) strong cashflows and option to invest in any future adjacencies and d) excellent execution and management quality."

Most efficient sugar companies like BRCM stand out during volatile scenarios, such as the current one, it added.

Finally, JM's note added, "We cut our EPS estimates by a modest 5-7% to reflect a) lower ethanol volume, b) larger increase in cane cost (INR 200/tn vs. INR 150/tn earlier), and c) higher sugar realisation (to reflect demand-supply tightness). We continue to value BRCM at 15xFY26EPS to arrive at a Mar'25TP of INR 500 (earlier Jun'24TP of INR 490) and maintain our BUY rating."

From the current market price and taking into consideration the target price, Balrampur Chini has the potential for over 27% upside ahead.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.