Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!

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Sugar stocks are rallying well the past few days, are almost touching some good highs.
@Mehnazfatima any thoughts if the sugar cycle is broken this time (or postponed) with the recent molasses/ ethanol happenings ? Thanks a lot for your thoughts.

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We are set to produce 30 million tons of sugar this yearā€¦hence Indian sugar sector is not in cyclical uptrend.

I am riding the ethanol and compressed bio gas and bio refineries play through Prajā€¦I appear to have timed my entry into Praj quite well and will be happy to hold it for next 12-24 months.

I am doing short term positional trade in sugar through Dalmia sugarā€¦got into it just before breakout and now holding on for next 2-4 months

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Thank you, though I trust my sugar stocks experience and knowledge (thanks to people like you), Iā€™m not so nimble footed on short term trades with cyclicals - got burned very badly with steel in 2018.
Iā€™ve never understood Praj at all, couldnā€™t model its earnings though Iā€™ve been trying for close to 10 years now (along with Jain Irrigation), so congrats to you !
Dalmia, I like the best (even better than Balrampur) as theyā€™re the most efficient and smartly aggressive too.
Tracking all these (incl Dwarikesh), hoping the ethanol and B-heavy molasses initiatives wouldnā€™t kill the industry cycle.

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Look at global picture madamā€¦brazil production will be at 10year lowā€¦!!
Also msp of 31/- will be big advantage and will directly flow to bottom.lineā€¦and itself suffiecient for huge profitsā€¦!!

As last q result all were in profit now just calculate it after after msp hikeā€¦!!

Also ethanol story may be keep running if same govt came back in power as they target 20% ethanol blendingā€¦this year 10%may be achieved so lot of room to run and not to forgot full impact of ethanol price rise by 5/- will be reflected in this quarter onlyā€¦

So so many fundamental struturL chnages happeningā€¦

Invested in avadh sugarā€¦km sugar and praj industries.

Regards

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As per sugar mills in UP, their cost of prdn is ā‚¹32.5 due to increase in Cane support price announced by Govt. Ethanol blending is at present only at 3% , expected to reach 5% by the end of the year. As the ethanol capacity increases 10 % will be achieved in couple of yrs and 20 % is far away. This year with huge carried over stick, performance will not be outstanding . Analysts contention that sugar industry is coming out of Commodity bias is far fetched in the present scenario. To achieve the kind of status like Brazil will take many yrs. The industry is very politically sensitive and too much Govt interference by way of cane lobby. Present bullishness is ahead of reality and likely to cool and come to realistic levels sooner than later.

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@DEEPAKSINGH,
From my experience seeing 2 full up-down sugar cycles, global factors matter very little in India, except when we have to import as happened in 2009-10.

In my opinion structural change to sugar cycle would happen only when industry is fully deregulated starting with implementing Rangarajan formula, which doesnā€™t look like happening at all. Current Central Govt was expected to be less regulatory but has tied the industry in regulatory knots with MSP, stock limits and what not that reminds us of 1960-70s.

Recent profits are slight surprise to me, which could be attributed to Govt allowing B-heavy molasses to ethanol, weā€™ll have to wait and see if these profits hold for even 1 year, normal sugar down cycle profits last atleast 2 years. Still it will be a stretch if even 5% ethanol blending is achieved all over the country this year OMCs have a bad habit of not blending if crude prices go below certain level when ethanol blending gets expensive.

In addition weā€™ve never been a great exporter and itā€™ll be interesting to see if companies are even able to export according to govt quotas.

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Exports are on a tear since December. Over 3x in Jan. (4x by volume).

https://phreakonomics.in/export-import/micro?startDate=2000-04-01&endDate=2019-02-01&currency=inr&commodity=12&country=&country[]=0&type=exports&consolidation=month

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Ehtanol blending going on rapidly nowā€¦here a cut from HPCL CMD interview few days backā€¦
The government has been talking about the ethanol blended program and about mandatorily blending ethanol with petrol and diesel. But we are far from achieving the targets.

Actually we are doing quite well. In fact, this year, it is almost 6%. All over India, ethanol blending will happen and in some states it has almost reached 10% also. We are doing well. The country needs more but the ethanol availability is an issue and for that, the government has taken various policy measures in terms of allowing production of ethanol from molasses, B heavy molasses, sugar cane juice and even the advanced fuels.

The government has taken policy decisions but the only constraint is the availability of ethanol. Otherwise we are ready to blend up to 10%ā€¦

  1. data from varinder bansal tweet regarding
    Ethanol sales this yearā€¦
    India Ethanol Industry Size
    FY13-14: 1,500 crore (@ 40/litre)
    FY18: Rs 5,000 crore litre (@ 40/litre)
    FY19: Rs 15,000 crore (@ 45-46/litre)
    Even at 80% of the contracted qty - ethanol supplied could be Rs 11500 crā€¦

  2. todays news
    https://www.google.com/amp/s/www.moneycontrol.com/news/trade-2/iran-buys-indian-raw-sugar-for-the-first-time-in-5-years-3583791.html/amp

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@phreakv6,
Thanks for the great info. Looks like the govtā€™s incentives to export (https://in.reuters.com/article/india-sugar/indian-cabinet-approves-incentives-for-2018-19-sugar-exports-idINKCN1M60YX) are working then.

According to the Reuters link plan is to export ~5M tons and since crushing happens till Apr in the major states, the monthly average might hold through SY18-19. Still it will be great if this becomes a good start for us to become a reliable exporter like Brazil

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Yes, Govt has been encouraging exports to Iran, Bā€™desh and Sri Lanka which are closer to us compared to Brazil - hopefully weā€™ll become regular exporter (with/without export subsidies).

Regarding ethanol sale numbers, are yours sugar industry/blending specific or overall numbers - till now petrol blending was a very small portion and the major users still are pharma and paint industries and if I remember right mills were able to get better prices from them (I donā€™t have data for this year with me now).

It will be great if we achieve E10 this year - Iā€™m keeping my fingers crossed. Some numbers about ethanol availability https://www.business-standard.com/article/economy-policy/higher-revenue-from-ethanol-to-cushion-sugar-mills-topline-and-bottomline-119020801049_1.html and:
a) Govtā€™s target is to reach E10 by 2022 https://www.business-standard.com/article/economy-policy/rs-8-500-crore-investment-lines-up-for-ethanol-two-third-by-sugar-mills-119020600305_1.html,
b) E7/E8 projected for 2018-19 https://www.business-standard.com/article/economy-policy/india-hopes-to-double-ethanol-blending-to-8-in-2018-19-sugar-season-118120701259_1.html

Going back to my main point, Iā€™m curiously wondering :slightly_smiling_face:

  1. If this is a structural change (though I agree aggressive E10 implementation is a game-changer) thatā€™ll even out the sugar cycle as we know it.
  2. Is there money to be made in sugar stocks if I invest now (with holding period)

Thanks for the great discussion.

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Simple and interesting explanation of Sugar Industry and changing dynamics.

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One thing which I think is not correct is that now ethanol can be produced from molasses (B grade bassage) and directly from sugar cane which was not the case earlier. It is not that lucrative only because gov has fixed a higher prices for ethanol produced from sugar and B-grade molasses. Gov. is giving higher prices plus it has allowed to produce ethanol from sugar and B-grade molasses (earlier sugar companies could create ethanol from C grade molasses only). Now they could produce more ethanol from the sugar cane directly which is very EBITDA positive and hence everybody is expanding they distillery.

Do anybody has link to educate and learn about ethanol product price (15 rs quoted in the video)

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The issue is that there is no binding to oil marketing companies to purchase ethanol. If oil price is low, it would not be lucrative for oil companies to purchase ethanol at this rate. So I donā€™t think the cyclicity is broken.
Disclosure - No position in sugar stocks.

I dont see this as a big problem. Oil may not go down that far.

The other problem is 20% higher rates of ethanol is to compensate the direct loss of sugar making capability. So if sugar cane is directed to ethanol that means sugar is not produced and that needs to be compensated. That is good for sugar companies as sugar as a division was victim of gov. policy but now in form of ethanol it is EBITDA positive

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Keeping an open mind about analyzing the sugar cycle ebb/flow and if it has become even tougher.
http://content.icicidirect.com/mailimages/EthanolBlending-2018.htm
With some simple calculations, at peak EBP (20%), assuming :

  1. Sugar mills provide 400 cr liters (bulk of the additional requirement) of ethanol
  2. 400 cr split evenly (200 cr each) between direct-from-cane and B-heavy molasses

This will help reduce sugar production by ~5 M ton (3.17 & 1.75 M tons respectively)
Taking just the potential calculations say for Balrampur where data is readily available looks like plenty of profits with ethanol compared to potential losses with sugar.
Remember Balrampur and a few other integrated mills were breaking even (some made small profits too and gave out dividends) at the worst period of the cycle too.

@Mehnazfatima and others, solicit your thoughts and how to play this for profits.

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Yes, ethanol gives sugar mills structural boost and cyclical issues will be resolved. Moreover MSP support from goi is helping too.

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Buy Dhampur Sugar till Sugar is Rs 35 per KG as under B heavy molasses dhampur will be the maximum gainer. Since under C heavy route you produce 118 KG of Sugar and 11 Litre of ethanol. Under B heavy route you produce 98 KG sugar and 22 Litre etahnol. which is equivalent to Rs 35 per KG sugar price under B heavy route. So Dhampur 2/3 B heavy molasses and 1/3 C heavy molasses.


my effort on Balrampur Chini Mills analysis

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Dhampur Q4 Results are out. Bottomline has improved.

Request for a detailed take/analysis on the results and what should be forecasted from now.

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