In a significant development impacting the ethanol-oriented sugar sector, the Indian government has implemented measures to curtail the production of ethanol from sugarcane, causing a downturn in the shares of key industry players. Balrampur Chini Mills, Dalmia Bharat Sugar, Shree Renuka Sugars, and Triveni Engineering, all involved in sugar and ethanol manufacturing, witnessed declines ranging from 1 per cent to 8 per cent on December 7. The move by the government is aimed at addressing a sugar shortage in the domestic market.
Over the past week, shares of these companies experienced a notable decrease, while Praj Industries, specializing in ethanol plant manufacturing, managed a modest gain of 1 per cent. This trend stands in contrast to the broader market, with the S&P BSE Sensex recording a 4 per cent surge during the same period.
The decision by the Department of Food and Public Distribution mandates that oil marketing companies (OMCs) will no longer procure ethanol from sugarcane juice and B-heavy molasses, effective immediately. However, the government encourages the production of ethanol from C-heavy molasses, as outlined in a notification dated December 5. This shift in policy is poised to impact sugar companies that have significantly relied on the diversion of sugarcane into ethanol production, a strategy that has proven lucrative in recent quarters.
Nirav Karkera, the Head of Research at Fisdom, notes that the government's clampdown on ethanol production may lead to an increase in sugar production, but the core output lacks the profitability associated with ethanol diversion. Many sugar companies have witnessed a run-up in stock prices due to the financial gains derived from ethanol diversification. The potential slowdown in ethanol procurement from OMCs could have a direct impact on the profit margins of these companies.
Companies such as Praj Industries, with a dominant position in domestic ethanol plant manufacturing, rely heavily on the bio-energy segment, contributing to 75 per cent of its income in the September-ended quarter of the fiscal year 2023-24. Balrampur Chini has expanded its ethanol production by 50 per cent, aiming to strike a balance between sugar and ethanol production for maximum profitability and sustainable growth.
Shree Renuka Sugars, having produced around 6.6 crore litres of ethanol in the first half of the fiscal year 2023-24, anticipates that ethanol may contribute 40 per cent of the firm's revenue. The government's decision to curtail ethanol production using sugarcane comes in response to an erratic monsoon in India, adversely affecting sugarcane crops and prompting the extension of export restrictions beyond October 31.
This move by the government is perceived as a setback for the sugar industry, which has invested significant capital over the last five years to enhance ethanol production capacity. Analysts express concerns that the government's diversion of supply from ethanol units could jeopardize the target of achieving a 20 per cent blending of ethanol in transport fuel by 2025, a crucial goal for the sector. The Indian Sugar Mills Association estimates an 8 per cent decline in sugar production to 33.7 million metric tons in the 2023/24 marketing year.
