According to JM Financial, global sugar prices have firmed up on expectation of higher diversion to ethanol in Brazil, and a decline in output decline in Thailand and Australia. Raw sugar futures reached a four-year high of 18.25 cents a pound this week, according to Bloomberg data. That price, according to Tropical Research Services, may prompt India to export more without subsidy this year.
Domestic prices rose to Rs 33-34 a kilogram in April, after remaining stagnant around Rs 30-31, underscoring higher summer demand. Motilal Oswal sees prices sustaining at higher levels.
Crisil Research estimates that the Rs 3,500 crore export subsidy, stable domestic demand, and a higher diversion and rising prices of ethanol could:
- Increase operating margins of sugar mills by 100-200 basis points to 10.5-11.5% on average for the financial year 2021.
- And further expand by 100 basis points to 12.5% in FY22 for integrated sugar mills companies because of the rising share of B-heavy ethanol, a variant whose prices have risen the most.
According to the investor presentation of Dhampur Sugar Mills Ltd.:
- The basic price of ethanol derived from C-heavy molasses rose Rs 1.94 a litre to Rs 45.69 for December 2020 to November 2021 supply period.
- For ethanol derived from cane juice, the price rose Rs 3.17 to Rs 62.65 a litre (ex-mill).
- B-heavy molasses turned costlier by Rs 3.34 to Rs 57.61 a litre.
Crisil estimates rising prices to make exports viable even in the absence of a subsidy from the government. India recently reduced the subsidy from Rs 6 a kilo to Rs for the sugar season 2020-21, with prospective effect.
In all, Crisil said the industry’s debt metrics are likely to improve on better profitability and lower working capital requirements as inventory levels decline.
Rakesh Arora, commodity expert and managing partner at Go India Advisors, sees multiple re-rating triggers for the industry, encouraged by ethanol push and potential deleveraging. While Avadh Sugar & Energy Ltd. offers value, he considers Dhampur, Balrampur Chini Mills Ltd. and Triveni Group better bets because of their higher ethanol capacity.