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The sweet surge in some sugar stocks in the first half of FY25 was driven by heightened buying by mutual funds seeking to benefit from increased production of ethanol, a byproduct to be mixed with automobile fuel, and a potential rise in prices. Mutual funds bought sugar stocks worth $86 million in the first half of the fiscal, which is 2.4 times the $36 million purchased in all of FY24, according to a 17 October report by DAM Capital Advisors.
The three sugar company stocks that dominated the purchases were Balrampur Chini Mills, Triveni Engineering and Industries and Zuari Industries, it said. There was a steady inflow into sugar stocks from June through September, DAM Capital said. It did not identify the mutual funds that bought sugar stocks in this period.
Balrampur Chini Mills has shot up 59% in the past six months, while EID Parry generated 23% returns to investors and Triveni Engineering rose 10%. The shares of Balrampur Chini Mills, EID Parry, Triveni Engineering, Bajaj Hindusthan Sugar and Zuari Industries are 9-27% away from their 52-week highs, hinting at further scope for an upside. Sugar companies are increasing production after the government lifted curbs on output of ethanol, a byproduct that is blended with petrol in order to reduce dependence on imported oil and address environmental pollution concerns.
Additionally, prices of ethanol and sugar are expected to increase. The price that the government pays for cane hasn’t changed since 2019 and has fallen below current retail rates of sugar. Also Read | Analysts said the rising diversion of sugar for ethanol production in sugar season 2024-25 (October-September) was a pivotal factor that ignited interest in sugar stocks.
The government advanced the target year of achieving 20% ethanol blending in auto fuels to 2025 from 2030, demonstrating its commitment to sustainable energy practices. That, coupled with the government's potential moves to increase the minimum support price (MSP) for sugar and ethanol further fuelled investor enthusiasm. “The outlook for the sugar segment is stable, supported by comfortable domestic sugar production estimates along with firmed up sugar prices and thrust on ethanol blending by the government along with providing remunerative prices for ethanol," said Vikram V, vice president and co-group head of corporate ratings at ICRA.
Ethanol blending in petrol increased to 15% in 2024 from 1.53% in 2014, the ministry of petroleum and natural gas said on 24 October. Vikram pointed out that current sugar prices are at 38-39 per kg, so any revision in the MSP - the floor price at which the government buys crops from farmers - above this level will support overall sugar revenue growth.
He expects integrated sugar mills to post revenue growth of 8-10% in FY25. He said volume growth in the distillery segment will remain strong because the cap on ethanol diversion has been lifted, along with the expected support from higher ethanol prices. “Ethanol prices are considered for revision since FRP (fair and remunerative price) and the Uttar Pradesh SAP (state-advised price) have increased considerably in the past two years, which has led to higher input costs for producing ethanol, so a revision is warranted.
Further, since the cost of production for sugar is higher than the current MSP of 31/kg, the revision in MSP is long due," Vikram said. According to Prashant Biyani, vice president of institutional equity research at Elara Capital, “B-heavy and juice ethanol prices should increase by at least 5%, whereas the MSP can increase to 36." B-heavy refers to a grade of molasses, which are a byproduct of refining sugarcane or sugar beet juice into sugar.
Biyani anticipates that if ethanol prices and MSP increase as expected, sugar volumes for Uttar Pradesh-based mills could grow in low to mid-single-digits, while ethanol volumes for sugar manufacturers may grow in double digits. As the 2024-25 sugar season approaches, the industry is advocating an increase in the MSP of sugar, according to media reports. The industry says an increase would facilitate the start of sugar mill crushing operations in November and ensure timely payments to farmers.
Without this adjustment, millers may be forced to delay crushing activities. Also Read | The West Indian Sugar Mills Association is said to have reached out to Union food minister Pralhad Joshi, urging an increase in the sugar MSP. Joshi indicated on 26 September that the government is considering increasing ethanol prices for the 2024-25 season and reviewing the MSP of sugar and sugar exports for the same period.
The minister said a committee of secretaries is discussing a proposal to increase the MSP of sugar. However, a recent report indicated that the committee of ministers chaired by home minister Amit Shah has postponed the proposal to increase the MSP of sugar for now. The year started on a very positive note when the government allowed production of ethanol from sugar syrup and B-heavy molasses in August.
Later, it allowed manufacturing of rectified spirit and extra neutral alcohol from B-heavy molasses and syrup, which had been restricted, Sunil Ojha, chief finance officer at Bajaj Hindusthan Sugar, told . “However, regarding pricing for both sugar and ethanol, the government's position on raising the MSP appears to have softened and the decision on any increase has been pending for quite some time," Ojha said. Over the past five years, the fair and remunerative price of cane has risen by 16.
4%, while syrup ethanol prices have increased by only 4.7% and B-heavy ethanol prices by 5.4%.
Additionally, inflation has impacted conversion costs and other consumables, he noted. “There has been no ethanol price increase during ESY (ethanol supply year - from November to October) 2023-24 for syrup and B-heavy ethanol and for ESY 2024-25. While annual tender ethanol quantities have been allocated, price increase is still awaited," he said.
Also Read | The government's MSP for sugar, which increased to 31 per kg in 2019 from 29 per kg in 2018, is due for another hike. Although the fair and remunerative price has increased by 20.6% since then, other costs have surged without a corresponding revision in the sugar MSP.
“Important to note that while in India the industry pays one of the highest cane prices, we get one of the lowest domestic sugar prices globally," Ojha emphasised. He said an increase in ethanol and sugar prices would be highly beneficial for the sector. It would support the industry in maintaining consistent supplies, investing in capacity expansion, ensuring timely payments to cane farmers, funding cane development to enhance productivity and efficiency, and driving innovation and technology advancements, he noted.
Queries to EID Parry India remained unanswered, while Balrampur Chini Mills declined to comment. “While current market prices are already higher than the MSP ( 36 per kg in Maharashtra and 39 per kg in UP), we believe an upward revision of the MSP would provide a stronger price floor and bolster investor confidence in the sector," Centrum Broking said in a report dated 7 October. However, the delay in increasing the sugar MSP could cast a shadow over investor sentiment.
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