The sugar industry will soon transform into an energy sector: Vijay Banka of Dwarikesh Sugar
Sugar companies have been buzzing on Dalal Street for the extraordinary returns they have delivered to investors over the past three years. Players like Rana Sugars, Shree Renuka Sugars, Triveni Engineering & Industries, India Sucrose and Dwarikesh Sugar soared between 300-1000% over the same period. Industry watchers believe the government’s focus on the sugar sector bodes well for the sector. In an interaction with business today, Vijay S Banka, Managing Director, Dwarikesh Sugar Industries, explained how the industry has changed and what the government’s emphasis on ethanol blending means for the sector. Edited excerpts:
Business Today (BT): How did the sugar industry go from cyclical to structural?
Vijay S Banka: The Indian sugar industry used to be a cyclical industry. Previously, they had two years of surplus, two years of deficit and one normal year. Thanks to successive increases in cane prices and the introduction of new and better varieties, farmers have been able to increase yield. Thus, India is now a structurally surplus sugar producer. This is the big change that has happened. Therefore, to fill the surplus, the government has:
A) The stock overhang: They try to solve this problem by encouraging exports. India has achieved phenomenal results in the export market over the past few years.
B) The ethanol blending program: This is how the big changes happened. Thus, India and the sugar industry are no longer cyclical.
BT: How can the government’s focus on ethanol transform the sugar industry? Do you think it is turning into the energy sector?
Bank : Absolutely, the government has very rightly identified the problem of the sugar industry because it is a surplus sugar producing country. So, they found an alternative use for sugar cane, and that’s where this ethanol building program comes in. The ethanol blending program will cause production to be sacrificed in favor of ethanol . The government has set ambitious goals. For example, they intend to do about 20% blending by 2025. With this kind of program, the sacrifice of sugar will be in favor of ethanol. Companies are now investing heavily in building ethanol capacity. And around the world, the trend is towards converting food into energy. So that’s what the Indian sugar industry is doing. Thus, it can be rightly said that the sugar industry is about to be classified in the energy sector.
BT: How do you see sales and profit growth over the next 5-10 years?
Bank : This ethanol blending program is a long term program and it is here to stay as the government also plans to introduce Flexi Fuel vehicles. So the ethanol blending program is a long-term program that will address the problems of the sugar industry. This will help the cash flow of the sugar industry as well as the profitability of the sugar industry and it will help the industry pay farmers remunerative prices on time. The composition of sales in the sugar industry will undergo a major change. In fact, it is already changing.
What will happen is that sugar, which previously made up more than 90% of the total value of sales of any sugar company, will drop dramatically. So in due course we’ll see maybe 30% of sugar company revenue coming from ethanol – that’s the distillery segment and maybe about 18% coming from the energy sector. Sugar addiction will be less and with sugar sacrifices, the overall sugar balance in the country will be reasonable.
There will be no surplus of excess stock which will result in better sugar prices. On the one hand, reasonable and remunerative prices for ethanol and on the other hand, with the expected moderation of sugar stocks, sugar prices will also become reasonable. This will contribute to the profitability of sugar companies in the times to come.
BT: How lucrative is trading ethanol for a sugar company like yours?
Bank : This is of course a lucrative proposition because, as I said, our whole sales mix is going to become more profitable. From an excessive dependence on sugar, we will now move away. To encourage the ethanol blending program, the government has set reasonable prices for ethanol. So, with improving sugar prices as well, we expect our business to be successful soon. This bodes well for the sugar industry and, of course, for us too.
BT: What are your plans for ethanol? How much capital expenditure did Dwarikesh Sugar make for the same?
Bank : We already have ethanol production capacity of 162.5 kiloliters per day (KLPD). We pick up another 175 KLPD plant. Hence, the total down payment is 232 crore, for this. Our project is in an advanced phase of execution and this plant should be operational by the end of June 2022. With the establishment of this plant, our ethanol capacity will increase to more than 330 KLPD per day, and, the model to which we thought is to run the distilleries on juice during the season and run them on heavy B molasses during the off-season.
BT: What will be the revenue mix of the sugar and ethanol sector in the future?
Bank : In our case, almost 30% of the revenue will come from the distillery segment, which is to sell ethanol and electricity, will represent about 7-10% of the total revenue. So obviously the sugar segment will come down to something between 60% and 65% in the future, which is a very profitable sales mix and will reduce our huge reliance on the sugar segment. This bodes well for our business.
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