Sugar stocks are on a roll with Simbhaoli Sugars, Dharani Sugar, Blarampur Chini Mills, Uttam Sugar Mill and Dhampur Sugar providing investors with much-needed relief.
But why are these stocks performing so well? The answer is to be found in sugar’s byproduct, ethanol.
On September 8, shares of Indian sugar companies soared after a media report stated that the government may soon consider raising the price of ethanol used in fuel blending. Chinimandi.com reported on September 7, that the government may raise the price of ethanol sold by sugar producers to state-owned oil marketing corporations by Rs 2-3 per litre during the upcoming sugar season 2022-23.
Ethanol is a biofuel derived mostly from sugarcane and corn through fermentation. Ethanol is a type of alcohol. Since the 1920s, a variety of alcohols such as methanol, butanol, and ethanol have been used to power automobile engines. Unlike oil, this agricultural residue is considered renewable energy.
India is the world’s third-largest importer of crude oil. In 2021, the country’s oil import bill exceeded $100 billion. India imports over 85% of its domestic oil requirements.
In 2003, India introduced ethanol as an automobile fuel. The ethanol blend had risen from 1-1.5% in 2014 to 8.5-10% by 2022. The ratio will continue to rise.
The government has set a target of 20% ethanol blending in petrol by 2030. The deadline was later moved to 2025.
In the previous eight years, ethanol consumption has increased nine times. In 2014, oil marketing companies purchased 300 million litres. This is predicted to increase to 10,160 million litres by 2025.
In the next three years, there will be a large need for ethanol. The sugar industry is a direct beneficiary of this trend.
According to ICRA, with the majority of sugar companies’ expanded distillation capacities commercialized in FY23, their credit profile would materially strengthen in FY24, driven by growth in profits.