For sugar stocks, ethanol prices need to reach a sweet spot

Shares of sugar companies such as Balrampur Chini Mills Ltd and Triveni Engineering & Industries Ltd are down 28-33% from their 52-week highs seen in April. A significant upward revision in ethanol prices would help improve investor sentiment. These companies have undertaken investment plans to increase their distillery capacities, therefore greater realization of ethanol sales is welcome.

The Indian government continues to push the ethanol blending program (EBP), which results in strong demand from oil marketing companies, equivalent to 10% EBP, and this is expected to reach 12% in ESY23, analysts said. of JM Financial Institutional Securities. This is also reflected in continued support for capacity expansion (distillery capacity at 8.9 billion liters, according to industry sources), they added.

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As sweet as honey

ESY stands for Ethanol Supply Year, which runs from December to November.

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In addition, the target of 20% ethanol blending in gasoline was accelerated to ESY 2026 from ESY 2030. The government increased the fair and remunerative price of sugarcane for the sugar season (SS) 2022-23. The season runs from October to September.

In this context, the evolution of ethanol prices would be a key element for investors to follow. Ethanol prices could be increased by 2-3 per liter for the ESY 2023, according to dispatches.

Given the growing appeal of ethanol, the sugar industry is diverting more supplies for ethanol production. During SS2021-22, an estimated 3.4 million tons of sugar production was diverted to ethanol, according to the Indian Sugar Mills Association (ISMA). In SS23, the quantity is expected to increase to 4.5 million tons.

Thus, the continuity of the ethanol program also depends on the stability of domestic sugar prices. To achieve this goal and ensure adequate domestic availability of the product, the government had regulated sugar exports for SS22 with effect from June 1. Initially, it capped export volumes at 10 million tonnes, but following record sugar production, an additional 1.2 million tonnes of exports were allowed.

In SS23, given the excess production, ISMA expects the government to allow exports of 8 million tons. Preliminary estimates of sugar production in SS23 amount to 35.5 million tons and consumption is expected to be 27.5 million tons. These are pretty much the same lines as last year. Any unfavorable regulation by the government for the sugar sector could impact investor sentiment.

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Rachel J. Bradford