Leading sugar mills in India are facing a dual setback, as the central government has made significant adjustments to the ethanol procurement policy that may hurt their margins. A key change in the procurement tender, along with the consideration of a lower-than-expected price hike for ethanol, is likely to impact the financial prospects of top sugar mills. This shift comes at a time when sugar mills had been expecting a favorable boost in their ethanol production, which is a high-margin product for them.
1. Prioritizing Cooperative Mills Over Private Players
In a significant policy shift, the central government has instructed oil marketing companies (OMCs) to prioritize the procurement of ethanol from cooperative sugar mills over private mills. This change, which was effective immediately, is expected to result in a reduced offtake of ethanol from leading private-sector sugar mills, such as Shree Renuka Sugars, Bajaj Hindusthan, Balrampur Chini, Dhampur Sugar Mills, and Dwarikesh Sugar. These mills have been significant producers of ethanol, benefiting from the government’s ethanol blending program, which is designed to reduce fuel import dependency while boosting the agriculture sector.
Cooperative mills, generally perceived to be in more need of government support, are now being given preferential treatment in this shift. This decision may lower the overall ethanol supply from private mills and lead to a decrease in revenues for them, as they will see reduced procurement volumes from OMCs.
2. Government’s Focus on Ethanol Blending Targets
The Indian government has been focused on expanding the Ethanol Blended Petrol (EBP) program to reduce fuel import dependence and support the agriculture sector. Under the National Policy on Biofuels (NPB) 2018, the government aims to achieve a 20% ethanol blending target in petrol by 2030. The move to prioritize ethanol procurement from cooperative mills aligns with the government’s broader social and economic objectives, but it may not be well-received by private mills that have been heavily involved in this growing market.
For leading sugar mills, ethanol has become an increasingly important revenue stream. It is a high-margin product compared to sugar, which has faced price fluctuations due to varying domestic and international demand. With the government now placing a cap on the volume of ethanol it will source from private mills, many players may see a reduction in profitability, potentially putting downward pressure on their stock prices.
3. Lower-Than-Expected Price Hike for Ethanol
Another concern for sugar mills is the news that the Centre is contemplating a smaller-than-expected price hike for ethanol. The mills had hoped for an increase of Rs 2-2.50 per litre in the price at which ethanol is procured, which would have improved their profit margins. However, reports suggest that the government is considering a more modest price hike of only Rs 1-1.50 per litre.
This price increase is crucial for sugar mills, as ethanol production has become a major part of their revenue streams in recent years. With the sugar market facing challenges such as surplus production, the higher-margin ethanol business has offered an alternative source of income. The lower-than-expected price increase will limit the upside potential for these companies, especially those that have ramped up their ethanol production capacities in anticipation of stronger demand and better prices.
4. Impact on Leading Sugar Stocks
The combination of reduced ethanol procurement from private mills and a lower-than-expected price hike is likely to have a negative impact on the stock prices of leading sugar companies. Stocks like Shree Renuka Sugars, Bajaj Hindusthan, Balrampur Chini, and others, which have large ethanol production capacities, could face downward pressure as investors recalibrate their expectations of the companies’ future earnings.
Sugar stocks have historically been sensitive to changes in government policy and commodity prices. Any adverse developments in the ethanol procurement program, which represents a significant portion of these companies’ revenue, could trigger a sell-off. Moreover, as sugar mills adjust their strategies in response to these policy changes, it could take time before the market digests the full impact of these decisions.
5. Long-Term Impact and Government Support
Despite the short-term challenges, there remains a long-term opportunity for sugar mills in the ethanol market, especially with the government’s long-term blending targets and continued focus on biofuels. However, the immediate impact of these procurement changes could be difficult for some of the private-sector mills to navigate. As the government continues to prioritize cooperative mills and offers a lower-than-expected price hike, mills will need to focus on adjusting their business models, optimizing their operations, and potentially diversifying their product offerings.
Additionally, as the EBP program progresses and demand for ethanol grows, the situation could stabilize over time, benefiting both cooperative and private mills. The long-term outlook remains positive for the sector, especially with the government’s ongoing efforts to reduce fuel import dependence and enhance the agricultural economy.
Conclusion
The recent changes to the ethanol procurement policy and the government’s consideration of a smaller price hike for ethanol are likely to create short-term challenges for private sugar mills. As leading companies in the sector face reduced ethanol procurement volumes and tighter margins, their stock prices could see downward pressure. However, the long-term outlook remains positive, driven by continued government support for biofuels and the ongoing expansion of the ethanol blending program. Investors will need to monitor these developments closely to gauge the full impact on sugar stocks in the coming quarters.
