In a bid to promote use of cleaner fuel, the government has advanced its ambitious EBP programme to 2025 i.e. 20% ethanol blended petrol and this shall be primarily beneficial to sugar companies in India as sugar companies in the country are also nudged to take on sugar production aggressively, with ethanol being the by-product.
Few of the short term advantages that the sector saw during the last few years were:
- Introduction of MSP or minimum support price
-Exports incentives for sugar were also introduced- 6 million tonnes of exports allowed in sugar year 2020-21
-Now this long term ethanol blended petrol programme (EBP) has also taken off aggressively say for instance oil marketing companies are procuring ethanol in huge amount i.e. 300 crore litres. Currently for the 10% ethanol blended petrol, the requirement shall be a huge 400 crore litre and for future course i.e. for 15% and 20% blending levels, there has been suggested a clear road-map.
All the companies with a higher capacity in terms of ethanol production will benefit more in comparison to those with sugarcane crushing capacity
Dalmia Bharat Sugar:
With sugar production plants in UP, the company is the largest sugar producing companies in India. The company will double its ethanol production capacity to 15 crore litre per annum. The announcement comes close on the heels of the government's target of upping ethanol blending to 25% by 2025. As of now ethanol blending in petrol is at 8.5%. Also, the company has benefitted immensely from exports on account of higher global sugar price.
In its May report, the brokerage said "With high global sugar prices, the industry would be able to export 5-6 million tonnes (MT) of sugar in the next sugar season as well. We believe aggressive sugar exports & 3-4 MT of sugar diversion towards ethanol wouldbring down sugar inventories to ~7 MT by September 2022, which would in turn push domestic sugar prices upwards. We believe now market recognises structural earning growth trajectory for sugar companies. Hence, we value the stock at 10x FY23E earnings".
Balrampur Chini Mills:
Balrampur Chini is the country's second largest sugar manufacturing company. Their capacity for ethanol production are to be seen between October and December 2022 and given the fact that it is a Greenfield project, the company's earnings shall be higher in FY24 in comparison to FY23.
Other positives of the company include:
Operating revenues are the highest in the industry at Rs. 1019 crore.
In net profit, the company is the industry leader reporting profit of Rs. 235.5 crore
ICICI Securities has set the price target for the stock at Rs. 385, an upside of over 8 percent.
BCML is the most efficient sugar company with sustainable earnings and strong cash flow generation. We believe the company would increase shareholder's payout (buybacks, dividend) to ~60% from current 40% payout. "We believe the market recognises the big opportunity in ethanol blending programme and the stock is poised to command better valuation multiples. We value the stock at 10x FY23E earnings with a target price of
Rs. 385 per share (earlier: Rs. 285) and maintain our BUY recommendation", said the brokerage in its report.
Triveni Engineering is into sugar production, power co-generation, distillery, industrial gearing, and water treatment solutions. Triveni Engineering & industries (TEIL) is one of top five sugar companies in UP with sugar crushing capacity of 60,500 tonnes per day and distillery capacity of 320 kilolitres per day (KLPD).
The stock of Triven Engineering currently commands a good to expensive valuation and on the financial front has been showing consistency and has good quality management. Return on equity has been strong for the company at 25% in comparison to its peers.
Note the listed stocks are taken from the brokerage recommendation. The story is for informational purpose only. The company nor its authors shall be liable for any loss incurred in case the decision on the investment has been taken considering the above story. Please consult investment advisors for any investment calls.