Sugar Stocks Rally Explained
The sugar traders and sugarcane farmers in India are in a bit of a panic. Domestic demand is low, a promised export-subsidy hasn’t come to their rescue, sugar is lying idle in storehouses waiting to rot and the export market is concentrated. In all of this, some sugar companies are switching to a more profitable by-product of sugarcane, Ethanol. Some of these sugar companies stood on their feet in this pandemic struck the market with just two things, ethanol, and exports. Let us find out how.
Sugar Goes Down, Ethanol Goes Up
Few of the sugar companies are having a tough time clearing their stocks because of reduced demand for sugar, both in India as well as abroad. Yet, some of the companies have managed to score profits, not on sugar, but on ethanol.
Ethanol is one of the by-products of sugar cane. It is extracted in a process called ‘Ethanol Fermentation’ or ‘Alcohol Fermentation. To simplify it, the sugarcane is fermented in a tank to produce Ethanol which is a form of crude alcohol, not fit for consumption. This Ethanol is used in many industrial processes. However, the Ethanol currently being produced is being used in two sectors.
First, hand sanitizers and disinfectants, the need of the hour. India was in a shortage of hand sanitizers and disinfectants at the beginning of the COVID-19 pandemic. However, sugar mills all across India started pumping up Ethanol production, and therefore more of these disinfectants could be produced for cheap.
Second, Ethanol is being used to dope petroleum and diesel. Most of India’s oil is imported. This increases India’s oil import bill. An increase in the usage of Ethanol in the mixture reduces the oil import bill and helps reduce vehicular emissions since Ethanol is a lesser polluting additive. India has hiked the prices of Ethanol by Rs 3.34 per liter for this purpose. This helps the farmers and traders at the same time combats the rising global oil prices.
Sugar Stocks Rally
As companies shifted focus from sugar to Ethanol, it reflected on their profit channels. The profit obtained from sugar declined 30-35%, whereas the profit obtained from distilleries producing ethanol increased a lot. Profits from Ethanol even doubled for some companies.
Following are a few of the sugar companies listed on the NSE and the increase in profits coming from Ethanol production over an Year(YoY). These companies don’t rely just on sugar production and therefore didn’t take the hit due to slumped sugar demand.
|Sugar Company||Increase in Profit% coming from Ethanol(YoY)|
|Dhampur Sugar Mills||158%|
|Dwarikesh Sugar Industries||547%|
|Avadh Sugar & Energy||114%|
|Dalmia Bharat Sugar and Industries Ltd.||160%|
Sugar manufacturers that laid emphasis on Ethanol and other by-products fared comparatively better than the ones that manufactured pure sugar. In the coming future, as global markets recover from COVID-19, inflation will go up and so will the oil prices. This will lead to a higher demand for Ethanol required to dope petroleum. Sugar companies in India can ride on this wave to score profits. Moreover, the excess unsold sugar that has been produced for the quarter may keep sugar demand and the prices low. Share prices of Eid Parry from Murugappa Group can be watched.
The Ministry of Consumer Affairs, Food, and Public Distribution had announced that they were planning an export subsidy for sugar traders to encourage them to export sugar. However, this did not go through. Traders and farmers who already have their stocks full need to sell them somehow. This will fetch the traders and farmers some liquidity to pay off their dues and continue the production cycle. The sugar companies were reluctant to export their products since they couldn’t get the right price for their stock. For some cases, the offer price was less than the cost of production but many found the right price for their stock and began exporting.
The government has been trying to push sugar cooperatives to produce more Ethanol. However, it took a pandemic for the cooperatives to start pumping Ethanol production which is ultimately helping them balance profits. Traders and investors should watch out for the announcement of government subsidies, and the transition to ethanol production in sugar companies.