Modi advances the mandatory mixing of biofuel with fossil fuel, UP-based listed sugar mills see bull run
A day after Prime Minister Narendra Modi advanced the deadline to make 20 per cent ethanol blending in petrol mandatory by five years to 2025, sugar stocks, particularly of mills based in Uttar Pradesh, rallied on the stock market on Monday.
Modi also released a report of an inter-ministerial committee which laid out a comprehensive roadmap for the development of the ethanol sector. So far, ethanol was being produced in sugar-growing states, but now it will be produced across the country with the setting up of food grain waste distilleries and agricultural waste ethanol plants, he said.
Ethanol is a biofuel, produced by processing organic matter. The fuels we commonly use are derived mainly from the slow geological process of fossilisation. Ethanol in India is obtained primarily from sugarcane through fermentation. Being high in oxygen content, it allows an engine to combust fuel more thoroughly and helps in reducing pollution. It can be mixed with fuel in different quantities and can help reduce vehicular emissions. Also, since it is plant-based, it is considered to be a renewable fuel.
Ethanol is manufactured by processing molasses, a sugarcane waste, a redidue left after producing sugar. The concept of ethanol blending aims to reduce India’s dependence on imported fuels. It also fits in with the policy of self-reliant India that the Modi government is pursuing.
The government had last year set a target of 10 per cent ethanol blending in petrol by 2022 and 10 per cent ethanol blending in diesel by 2030. In 2020-21, oil marketing companies (OMCs) raised the proportion of ethanol blended in petrol to 8.5 per cent from 5 per cent in the previous year. The procurement of ethanol by OMCs almost doubled to 332 crore litres from 173 litres in the previous fiscal.
As the demand for ethanol will rise, the sugar companies will also be able to earn from the waste (molasses) by converting it into a profitable item. On this narrative, the sugar stocks spiked on Monday. These stocks have been rising since two-three quarters but the spike on Monday was swifter.
S Ranganathan, Head of Research at LKP Securities, said, “We have been extremely bullish on UP-based sugar companies for the last one year, based on the premise that the ethanol story will pan out well and capacity additions at distilleries in anticipation were being built up. Today, with the blending targets adcvanced, all the fully integrated sugar companies based in UP, namely Balrampur Chini, Triveni Engineering, Dhampur Sugar, Dalmia, DCM Shriram and Dwarikesh Sugar, have seen their stock prices rise manifold.”
Balarampur Chini surged three times from Rs 120 to Rs 340, Triveni Engineering four times from Rs 45 to Rs 170, DCM Shriram two-and-a-half times from Rs 280 to Rs 750, Dhampur Sugar three times from Rs 120 to Rs 355, and Dwarikesh Sugar three times from Rs 20 to Rs 63. All these stocks have risen to their current level in the last one year.
Sugar stocks have been seeing multiple long-term and short-term tailwinds since some days. With the accelerated need for ethanol, sugar companies are bound to see capacity expansion for ethanol production, driving higher margins compared to the current sugar realisations. In the near-term, supply constraints and output limitations from major exporting countries such as Brazil, Thailand and the EU augurs well for Indian sugar prices.
While cautioning investors not to get carried away in this frenzy, Nirali Shah, Head of Research, Samco Securities, said, “Investors must keep in mind the cyclicality of the sector and the Fair and Remunerative Pricing (FRP), and subsidy prices, before jumping into the bandwagon as there are several risks involved despite the favourable macros.”
The procurement of ethanol by OMCs is governed by an administered pricing mechanism that fixes prices every year based on the raw material used. Fixing of the price of raw materials for production had led to India producing ethanol at prices higher than other countries, the inter-ministerial committee report said.
The price of ethanol production in India ranges from $0.63–$0.87 a litre, significantly higher than the US and Brazil where it is about $0.61 per litre.