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

Pankaj_Dharamshi · May 7, 2020, 1:54am

Pandemic to melt sugar mill profitability by 150-300 bps – Crisil

Weak business performance and elevated debt levels to impact credit metrics

The Covid-19 pandemic is expected to exert downward pressure on the credit quality of sugar mills by eroding operating profitability and shoring up debt in fiscal 2021 (April 1, 2020 to March 31, 2021), an analysis of 26 CRISIL-rated sugar companies, which carried debt of over Rs 11,000 crore as on March 31, 2020, shows.

The operating profitability is expected to decline by 150-300 basis points (bps) due to a troika of factors namely, reduction in industrial usage of sugar, lower demand for sugar mills derivative - ethanol and fall in exports. Consequently, lower accruals and higher inventory are expected to lead to elevated debt levels and deterioration in the credit metrics of sugar firms.

First of these factors is the expected reduction in industrial usage, which accounts for nearly two-thirds of the annual demand of ~26 million tonne, as several food manufacturing units – including soft beverages, chocolates, confectionery, bakeries, hotels, restaurants and cafes – are either shuttered or running at low capacities. As a result, overall domestic demand is expected to be lower by 1.5-2 million tonne in the current sugar season, as reflected in softening prices over the past few weeks.

Second, oil marketing companies would reduce ethanol off-take because the lockdown has lowered demand for fuel. Besides, they have limited storage capacity available. Production of potable alcohol from ethanol would also be impacted because demand from distillers would have declined.

Third, international sugar prices have fallen ~23% between January and April as large supplier-nations, including Brazil, are switching from ethanol to sugar due to slack global oil demand and low crude oil prices. Thus, exports from India are likely to remain flattish compared with a 25-30% growth expected earlier.

Pandemic to melt sugar mill profitability by 150-300 bps - CRISIL

Mukundks · June 3, 2020, 6:50pm

Karthisn1 · July 8, 2020, 4:53pm

the price was decided in the beginning of the year, the method of deciding the price of ethanol B-Heavy has nothing to do with crude, it’s sugar price, so crude could be 20 and B-Heavy could
move up next year or crude could 100 and B-Heavy could only move to the extent
of Sugar price MSP increase- Balrampurchini concal.

VALUE2017 · July 9, 2020, 5:21am

But on an overall basis is it viable to buy costly Ethanol as compared to Cheaper Crude.
In an ideal situation Ethanol prices should be directly linked to Crude pries and not to sugar.Ethanol is being bought by the Government at incentive rate to support the Sugar Industry. This kind of model are not self sustainable and depend on the vagaries of incumbent government.

1st January 2020 1st July 2020
International Price of Brent Crude Oil with Ocean Freight (round off) 67$ per Barrel 42.68 $ per Barrel
Currency Exchange Rate Rs 71.4 / USD Rs 74.75 / USD
Crude Oil in Indian Currency Rs 4784 Rs 3190
1 Barrel of Crude Oil 159 Litre 159 Litre
Crude Oil - Cost per Litre Rs 30.08 per Litre Rs 20.06 per Litre
Petrol Price - Per Litre (Delhi) Rs 75.14 per Litre Rs 80.43 per Litre
Diesel per Litre (Delhi) Rs 67.96 per Litre Rs 80.53 per Litre

Wondering what happened in last 6 Months where despite Falling Crude Oil Prices you paying higher Fuel Prices

Simplified Calculation Chart for Petrol & Diesel Prices in New Delhi - (as on 1st July 2020)

	Petrol Price Calculation*	Diesel Price Calculation *
Basic OMC Cost Calculation
Crude Oil including Ocean Freight	Rs 20.06 per Litre	Rs 20.06 per Litre
Refinery Processing + Refinery Margins + OMC Margin + Freight Cost, Logistics	Rs 4.86 per Litre	Rs 6.97 per Litre
Fuel Price after Processing (Ready to send to Petol Pump)	Rs 24.92 per Litre	Rs 27.03 per Litre

Central Government Taxes & Dealer Commission
Additional: Excise Duty + Road Cess as Charged by Central Government	Rs 32.98 / Litre on Petrol	Rs 31.83 / Lit on Diesel
Commission to Petrol Pump Dealers	Rs 3.64 per Litre	Rs 2.54 per Litre

Fuel Cost Before VAT
Cost as on 1st July 2020	Rs 61.87 per Litre	Rs 61.7 per Litre

VAT Calculation
Additional:VAT (30% on Petrol and 30% on Diesel. Additional Cess on Diesel) (1st July 2020)	Rs 18.56 / Litre on Petrol	Rs 18.83 / Litre on Diesel

Final Retail Price as on 1st July 2020 in Delhi	Rs 80.43 per Litre	Rs 80.53 per Litre

Very Important : The Petrol been Sold in India from End 2017 has 10% of Ethanol been Mixed with Petrol. Been Ethanol is a natural Fuel (as made from Sugar and starch) and very well can be mixed with Petrol without any changes and also has no PM (Particulate Material) Pollution.

However - the catch is Ethanol is priced at just Rs 47.89 per Litre, but is mixed in Petrol and the given rate is combined rate as been sold to consumer

It means that if your car go for petrol Tank Full of say 30 Litres - then in actual your car will get 27 Litre Petrol and 3 Litre Ethanol - but the rate charged would be the price of Petrol only - means you have to pay price of 30 Litre Petrol.

Also - there is slight a caution to Car Owners that they should ensure that Water does not come in contact with Petrol by any chance during Car Wash or Fuel Refill. If you going for Fuel refill during Monsoon and a small contact of water will lead Ethanol to break as separate layer against Petrol and this will end up giving Jerks making the car difficult to even start with.

Had it been ideal world - we would have ended up with Fuel Cost of Rs 25 per Litre for Petrol and Diesel. Irony is - we are paying 2 Times or even more Taxes than the Cost of Obtaining Petrol Fuel in some states

Taxation Scenario on Petrol and Diesel Fuel

Do you always Wondered that Despite of Falling International Crude Oil Costs, Petrol and Diesel Prices in India are on higher Side

Apart from Crude Oil Rates - There are 2 Important Factors which determine the Fuel Cost - VAT and Excise Duty - which is as below

	Tax in November 2014	Tax in August 2017	Tax in July 2020
Excise Duty on Petrol	Rs 9.20 per Litre	Rs 21.48 per Litre	Rs 32.98 per Litre (incl. Road Cess)
Excise Duty on Diesel	Rs 3.46 per Litre	Rs 17.33 per Litre	Rs 31.83 per Litre (incl. Road Cess)
VAT on Basic Price on Petrol	20% on Basic Price	27% on Basic Price	30% VAT
VAT on Basic Price on Diesel	12.5% on Basic Price	16.75% on Diesel + 25p Cess	30% VAT

Disclaimer : - Excise including Road Cess, Fuel Price Calculation done in Delhi, VAT rates in Delhi. Excise rates Standard Pan India

Taxes Paid for Obtaining Fuel (July 2020)

Below are Taxes Paid for Obtaining Fuel in Delhi (Scenario is not much different in other cities too - almost similar or even higher taxes charged)

	Tax Paid for Obtaining Fuel	Total Cost of Fuel
Petrol in Delhi	Rs 51.54 per Litre (64%)	Rs 80.43 per Litre
Diesel in Delhi	Rs 50.66 per Litre (63%)	Rs 80.53 per Litre

Basis - 1st July 2020 Prices in Delhi

It means for Every Litre of Petrol you are filling – you are paying a steep tax of Rs 51.34 per Litre in Delhi to State and Central Government. Its even higher in Other cities

If you are Staying in Mumbai - you are paying highest Taxes on Petrol Prices in India. Reason Mumbai has highest State Level Taxes (VAT with additional Surcharge) and petrol prices in June 2020 records a high of over Rs 86 per Litre. The Excise+VAT+Surcharge in Mumbai is almost the highest making Maharashtra with Highest Fuel Prices in India

Know More -

» Why Petrol and Diesel Prices are High in India - Reasons for High Petrol and diesel Price in India

» Taxes on Buying Cars - Know Taxes Paid as Ownership Cost of Car

» Petrol or Diesel Cars - Guide on Which Car should you Buy

» Hatchback Cars with Best Mileage

» Sedan Cars with Best Mileage

Fuel Prices in India - based on Prices on 1st July 2020

	Petrol Price / Litre^	Diesel Price / Litre^
New Delhi	Rs 80.43	Rs 80.53
Mumbai	Rs 87.19	Rs 78.83
Chennai	Rs 83.63	Rs 77.72
Kolkata	Rs 82.1	Rs 75.64

^ - Prices as on 1st July 2020

Wondering for Fuel Price Difference. One of the Major Reasons for Discrepancy in Fuel Prices across States is that no GST Framework on Petroleum Prices and still VAT at differential rates been charged along with additional surcharge in some states

» VAT Rate Difference - VAT rate varies from state to state and to give instance on Petrol is highest in Maharashtra, Punjab, Telangana, Kerala, TamilNadu while some states like Goa have lowest VAT on Petrol, thats why Petrol selling at such low rates in Goa.

All this leads to different Prices of Petroleum Products in Various States and Union Territories in India

vinaygb123 · August 11, 2020, 4:59pm

With my limited knowledge there is a news flow saying a bill is tabled in parliament
#Lower Taxes
#Price increase for Sugar

Ethanol price increase

.etc

aashav23 · August 12, 2020, 2:04pm

Would the Govt. really be keen on increasing Ethanol off-take price, given the falling crude? It makes no economical sense in my limited understanding.

rkoti · September 29, 2020, 3:51pm

What are the expert views on the farm sector liberalization on sugar industry?

Regarding ethanol - coal india is setting up coal gasification plants to convert coal into ethanol. Sugar companies cannot match such industrial projects.

MHS · September 29, 2020, 6:07pm

What is the reason to mix Ethanol at Rs 47.89 when fuel itself is available at around Rs 24.92 before central and state taxes ??

Is it to support sugar industry??

preposturous · November 28, 2020, 8:49am

I think the idea to mix Ethanol is more to reduce the import bill of crude . Ethanol is internally produced by many companies and can help reduce forex dependency and crude oil price dependency.

prasobh · December 1, 2020, 7:08pm

Ethanol prices are in Rs/BL. Hope this clarifies!
Source : Balrampur investor Presentation

bhaskarbora67 · December 17, 2020, 4:08am

Cabinet approves Rs 3,500 cr subsidy to sugar mills for export of
60 lakh tonnes of sweetener
The government on Wednesday approved a subsidy of Rs 3,500
crore to sugar mills for the export of 60 lakh tonnes of sweetener
during the ongoing marketing year 2020-21 as part of its efforts
to help them clear outstanding dues to sugarcane farmers.
Briefing media after the meeting, Information and Broadcasting
Minister Prakash Javadekar said the Cabinet Committee on
Economic Affairs (CCEA) has approved a subsidy of Rs 3,500 crore
on exports of 60 lakh tonnes of sweetener and the subsidy
amount will directly be given to farmers.

Mehnazfatima · January 13, 2021, 3:37pm

The last sugar rally was based on the bottom formation in the domestic price of sugar. Now technically it seems that the sugar price has formed a multi year base and is poised to rally significantly from the present level of around 36 rupees / kg. A monthly close above 37 rupees / kg indicates a multiyear breakout in sugar price.

In the last rally the Govt capped the sugar price @ 40 rupees / kg and did not allow the price to go up. But this thime it appears that the sugar price may go up signficantly…maybe to 60/70 rupees / kg. and that will lead to huge eps gain for sugar stocks. The global sugar shortage and Govt subsidy for sugar exports and ethanol policy will ignite this round of sugar rally.

Just wait for a monthly wholesale closing price above 37 rupees / kg and then jump in for good gains.

like last time …i feel that this time too it is far better to analyze the sugar sector through price analysis of the underlying commodity (wholesale sugar price).

Most probably we may see a good sugar rally in 2021 / 2022.

I am not recommending that we buy sugar stocks now.

If the sugar price has an upside breakout and starts rallying… then we consider buying sugar stocks at lower levels

Compounder · January 13, 2021, 6:23pm

Hi, what would be your top 3 picks in the sugar sector in case indicators pan out favourably? Thanks

Mehnazfatima · January 13, 2021, 10:26pm

I like the 4 sugar companies in which Anil Kumar Goel holds a significant stake…Dhampur, Dalmia, Dwarikesh and Uttam sugar.

Those who want to play it safe may go for the big daddy…Balrampur chini…

I am not willing to go beyond the above names…

Quest4Value · January 14, 2021, 6:41am

1)high level of inventory
2)demand not yet fully recovered from covid impact
3)good monsoon and reservoir levels
4)ethanol policy will have an impact only when crude oil prices move higher
In my opinion these suggest the bottom of the cycle is yet to come.Maybe when the demand recovers and poor monsoon/el nino situation would provide a good opportunity.
Open to any contradictions, huge respect for your insights in the last upcycle.

sgkfinance · January 14, 2021, 7:31am

Huge respect following you and a couple of others in the last cycle - Dalmia was my almost only play then, but I missed the top though I sold later at half-way in between.
My learnings from then:

Govt aggressively intervened and killed the last sugar cycle as you rightly pointed out when sugar price (which has been always the cycle determinator till now) wasn’t allowed to go beyond Rs.40 by various measures.
Other measures like sugar buffer stock will never allow sugar demand/deficiency to allow runaway hike in sugar prices which in turn rallies the stock prices.
Compulsory ethanol mixing w petrol has moved the needle (in my opinion) from sugar as a cycle determinant to ethanol. Whichever strong companies (you listed them - Balrampur, Dalmia, Dwarikesh) have good mix of sugar/ethanol capacity will be more profitable.
On the other hand, as long as the ethanol policy continues, sugar planting and output will increase, and in turn mills will always have a base profit based on selling ethanol profitably with sugar more/less break-even or making a slight profit. I don’t think as in previous cycles even good companies’ share prices will take an extreme beating because of extreme sugar losses, thus giving us buying opportunities.
Similarly I don’t see extreme profits either as sugar prices will be tightly regulated, and even on a small increase, the buffer will come in, hence moderating profits.

In the best case we might make a 2-2.5x profit which I think isn’t worth the risk. Hence watching eagerly from the sidelines.

Donald · January 14, 2021, 7:33am

Thanks Mehnaz for your timely alert/inputs. Appreciate

I had a basic question. Given the distinct Export possibilities, why wouldn’t a Renuka Sugar or an EID Parry figure in the investible prospects?

sgkfinance · January 14, 2021, 7:57am

Donald,
I don’t see distinct export possibilities, reasons are:

We don’t produce sugar at the lowest cost in the world (many reasons…) hence the Govt has to pitch in with an export subsidy which is just enough to recover the mills’ cost or a small profit, so the mills can in turn pay the farmers.
Historically Indian govt has played politics with sugar (current govt is the worst since I started tracking). This is ironic as sugar is among the smallest items in a house-hold budget. Indian Govt always intervenes with sugar exports/imports and India is not seen as a reliable exporter.
There were many committees (Rangarajan committee was the last) and all of them pitched for total deregulation. Even some half measures Cong took towards de-regulation have been killed by this govt - possibly with Maharashtra/UP in mind as the 2 states produce ~75+% of the country’s sugar.
While the govt has aggressively done ethanol mixing and proceeding to E20 (20% ethanol in petrol), it has ended up with farmers growing more cane (with better varieties and yields) and has increased the cane/sugar supply rather than moderating the sugar supply which it was supposed to achieve.

In my opinion EID Parry doesn’t have the scale to make extreme profits (though TN state has the best yielding canes till now and scientific cultivation). The biggest mills crushing the most cane are either in Maharashtra or UP. Renuka is among the biggest and has full integration, but the stock was diluted so much with the Wilmar acquisition, and additionally they aren’t the cheapest sugar producer internationally.

Most importantly, I think we export raw sugar and not the end product or even value added products like sugar cubes, so profit from exports (anyway subsidized by the govt) is still low or nil.

Donald · January 14, 2021, 4:26pm

Thanks Ganesh for your inputs.
Let me put in some more basic questions, that I got from quizzing a few friends - with varying expertise levels in profiting from sugar cycles - who think this sugar cycle may go either way - Ethanol Play or International Prices play.

Is it a fair argument to say, that if you think one can profit from
a) Ethanol play - then Dhampur/Balrampur are obvious choices
b) International Sugar prices play - then Renuka followed by EID Parry may be best bets
c) If International sugar prices do go 3x (from 12C) - why should it matter whether Indian producers are cheapest producers or not?
d) One argument also goes like - Delta will be higher in sugar prices play, sugar being a commodity. Renuka derives 90%+ sales from Sugar

These are basic questions I am pondering over (not long term sustainability) over the sugar bet. Will be glad to receive some pointers from anyone experienced in profiting from sugar cycles.

Disc: I am a complete novice at the sugar cycle, and here to learn; last time I chickened out prematurely as recorded in this thread itself.

Mehnazfatima · January 15, 2021, 6:55am

Renuka is a sugar processor. They have limited crushing capacity in india. They import raw sugar and export refined sugar. Further I prefer stocks with low equity base whereas Bajaj and Renuka have very high equity base.

EID parrys is TN based. The govt there has almost killed the sugar industry and consequently Karnataka has gained from that migration out of TN. Also Parry’s is a holding company…so in upcycle that proves to be a drag on rapid stock price rise.

But first let us wait for an upside breakout in sugar price…till that breakout happens sugar stocks may remain rangebound

I prefer UP based sugar stocks. If the international sugar price goes up hugely…then india can export all of its huge surplus and buffer. But exports cannot be done by UP based sugar mills as they are too far away from ports. Therefore most exports are by Maharashtra, Karnataka and TN based sugar mills while UP mills will earn more through rise in sugar price in india.