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

How do you see pure play Sugar stocks like Ponni Erode ?

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pl go through Investor call recoding of Dhampur Bio. Salient points:

  • Cane crush quantity for this season - no guidance as not sure.
    Cane crushing capacity was increased from 22,500 TPD to 27,000 TPD but cane crushed has not increased. Even cane crush days will not come down (as per concall) then what was the use to investing Rs 60 cr in increaseing crushing capacity

  • Recovery - cant say right now. too early

  • Distillery - will remain underutlised inspite of capex of 50cr for grain based modification. they could not bid for maize based ethanol as plant was not ready!! Management view - Maize prices are anyway going to be very high… but if it comes down due to some reason like imports… then also they will not be able to make ethanol from maize !!

  • Company has plant for pharma grade sugar exports - but exports are banned ! so realisation is not as expected. Dont know how much was spent forr pharma grade refinery… should not be less than 50 to 100 Cr

  • Focusing on country liquor - but realisation is falling…

  • What is to be done with profits/cash as there is no capex - this is most convoluted reply i have ever heard.

Effectively about Rs. 200 crs of capex is not yielding any incremental revenue/ profit for the company. Unnecessary annual cost of 30 to 35 crsby way of depreciation and interest.

Lots of promises but poor delivery… company has potential but something or the other goes wrong… is it bad luck or bad management?

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I do not track this company.

MD of Dhampur Bio made the same point - crude oil prices have come down so it will be difficult to increase price of ethanol but ISMA is trying to push for at least a few Rupees increase. But with oil prices going down even more - this will also not be possible.

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i have invested in dbol ,as i feel it offers great value at lower 120 levels ,we are probably at the bottom of the cycle .when it reverses is anybodys guess.

yes… it is a good level to buy… but given market sentiment it could go to 100 levels this time. This is because of overall excess capacity in ethanol and high sugar stocks due to extremely bad Govt. decisions…
India is importing maize for ethanol and keeping sugar in stock (at record levels) when international sugar prices are high… maize ethanol is Rs. 72 per liter and cane based ethanol at Rs. 60… this is an example of buying high and selling low !!!

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https://www.orfonline.org/expert-speak/ethanol-blended-petrol-for-energy-security-india-s-self-goal#:~:text=India%20usually%20exports%202%20MT,self-reliance%20by%20reducing%20imports.

Unbiased fact based report. Highlights what the Govt is doing wrong.

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This is a good example of wrongs in ethanol procurement. When sugar stocks are high in country, players are still resorting to import of corn and maize for ethanol production since procurement prices do not make any sense

Certain spik on sugar price at international market:
DATE : NOVEMBER 19TH 2024 TUESDAY.

M A T SONS, CHENNAI.

YESTERDAY NIGHT INTERNATIONAL MARKET CLOSING RATES ARE AS FOLLOW.

LIFFE REFINED SUGAR (LONDON).
MAR 25 : 573.50 + 18.50
MAY 25 : 566.90 + 16.10
AUG 25 : 551.00 + 13.30

ICE RAW SUGAR (NEWYORK)
MAR 25 : 22.20 + 0.62
MAY 25 : 20.65 + 0.55
JUL  25 : 19.84 + 0.48

players have been forced to import as maize is not available at high price also. Even with imported maize they are making loss - but they have to meet commitment of ethanol supply or we will not met 20% blending target !! so to support them Govt has increased maize ethanol price to Rs. 72 / litre and forced sugar companies to shut ethanol plants and keep high levels of sugar stocks…

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Domestic sugar prices are falling. international prices have no impact on sugar companies as export is not allowed. Most likely realisation of sugar companies will come down in coming quarters.

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most of the sugar scrips have fallen a lot… now is the time to take a risk and buy.
medium term positives:
most likely govt will allow exports of some sugar which will improve margins.
marginal increase (Rs 2 to 3) in ethanol prices will have to be done as cane prices have gone up.
Maize ethanol share will come down from 55% to 30to 40% as some plants will convert to ENA and some may even shut down.
maize prices expected to come down by April / May due to imports and then sugar mills can produce ethanol from maize.

Risk-return at these prices is decent now.

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Wait and watch situation on the sector:

  1. MSP
  2. Export
  3. Ethanol

Agree on your statement but NO EVENT Play out after election.
and weakness on Global demand and price also

Even if Govt. does not increase MSP of sugar market price will increase. It has already increased by 1 rupee in past one week and will increase by Rs. 2 to 4 by Jan.
If Govt stops sugar ethanol then maize price will reach 35 rs/ kg !! and then maize ethanol will either stop or they will have to increase price of maize ethanol to Rs. 80. Ethanol blending will go down to 5% (target of 20% by next year)
It has become a big mess for all. and simple solution is to increase MSP of sugar to Rs. 43/44 and continue sugar ethanol. But they have been doing exactly opposite.

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Many sugar companies have corrected 50% from their highs - as Sugar recovery is low across UP and Maharashtra. Production will lesser but prices will shoot up 10% to compensate.
Profitability will be lower but not much lower than last year (which was already low due to ethanol ban). Valuation of many companies is attractive.

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Thank you for sharing your valuable analysis on sugar stocks…
Can you share which stocks are looks attractive currently?

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Almost all of them are at good levels. Please note that the sugar recovery this year is going to be low leading to high cost of sugar/ ethanol. this is the reason why stock prices have come down. eventually sugar prices will increase and compensate for the high cost.
the main point is ethanol price - if this is not increased then there could be some problem but at current stock prices stagnant ethanol price is factored in.
Many sugar mills will convert to ENA this year which is higher margin business - keep track of those companies converting to ENA for IMFL or country liquor.

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look at Book Value apart from EPS and you will get few ideas.
most sugar companies will show flat profits this year so companies below BV should be a good bet.

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Sugar Industry: the ethanol story

@Aarti looking forward to you critiquing my view on sugar industry

Would like to begin by saying as sugar inventories are increasing, we are late into the cycle, before trouble breaks out for the weaker balance sheet players. Ethanol revenues continue to rise as a percentage of names like Balrampur chini and I expect this to play out over next few years also. However rising sugar inventory will lead to rising debts for sugar mills
Will Ethanol production end the cyclicality in the sugar industry causing a higher PE rating for the sugar industry of India?
The Nomenclature is such that 20% blended Ethanol with Petrol will be labelled as E20. - Target for 2025, earlier it was 2030, but the corporate capex and industry speed helped government prepone the target. So not seeing a long runway on this. 13.9% ethanol blending was achieved as of November 2024, rest of year target 15%. Now the question is how much more sugar company revenues can come from ethanol production in the medium term? How much ethanol revenue to expect for current 20% blend target?
For Balrampur Chini(Crores)
Expected Expected
FY20 21 22 23 24 15% target 20% Target
Revenue from ethanol 566 842 1001 1164 1689 2109.4 2812.6
Revenue from sugar 4423 4352 4263 4339 4697 4697 4697
Total revenue 4989 5194 5264 5503 6386 6806.4 7509.6

% REV FROM ETH 11.3% 16.2% 19.0% 21.2% 26.4% 31.0% 37.5%

Cr BL-ethanol 10.66 12.76 17.06 16.31 21.49 26.84 35.78

Cr BL for industry 189 173 290 434 506 631.97 842.63
Blend achieved 5.00% 5.10% 8.00% 10.02% 12.01% 15% 20%

Some quick calculations I ran, Balrampur chini currently has 26.4% revenue from ethanol, target of 20% blending will not be achieved over next few year, so we have crossed halfway mark of this, at 20% blend , Balarampur should have a 35%+ revenue from ethanol sales at a bare minimum. This is a very conversative estimate, company claims 50%, one can take a 40% estimate.
Some cyclicality is being reduced on the revenue side, possibly by half. Though, in no way in this sector cyclicality is coming down on Sugarcane(raw material) side, cane cursed is a function of produce, Agriculture commodities like sugar are always cyclical, some years more, some years less. In years we have low sugarcane produced – less is available for ethanol and sugar produce and revenue is down, and those years government would want to focus on food security than energy security – ethanol. Sugar prices are always above MSP of Rs. 31kg. On years when more is produced export is allowed of excess sugar after adequate reserve is maintained in country. That is a great revenue for the mills provided international sugar prices are holding above local mill costing. As you can imagine food security and stability of sugar prices is a primal aim here in this heavily regulated sector. As of now no sugar export allowed

State governments fix prices of Sugarcane awarded to farmers.
The Sugarcane cycle(which management wants you to believe is about to end and become straight line):
Stage1: Sugar prices are high, Sugarcane cultivated area is low, Sugarmills give out farmers payments on time.
Stage2: Sugar prices are not increasing, Sugarcane cultivated area increases because of timely payments last year, Sugarmills give out timely payments to farmers
Stage3: Sugar prices are low, Sugarcane cultivated area has increased further, Sugar mills are in trouble, they have to payout a government fixed price and sugar prices are low because of existing inventories
Stage4: Some sugar mills have filled bankruptcy, area under cultivation has reduced because farmers were not paid on time or not paid at all last time.

This typical cycle lasts 5-7 years. Now the new variable is Ethanol. The excess Sugarcane produce will be absorbed here till we do not meet targets. A bad year in our Sugarcane farms because of pest, draught, disease will be bad year for the industry as well. Revenues should be down. Although talking to farmers I have realized sugarcane is considered a very robust crop. It is not like cotton where you could end up with zero revenue after an year in a bad year. Even in bad years, some returns to be expected.
We have a requirement of 1016 crore litres of ethanol to meet 20% blend target. We produced for FY23-24 506 cr liters. In my estimate we have a few good years ahead till we reach excess again. However one must consider reserves, we will for sure as a nation start keeping ethanol reserves, although not sure how much will come from sugar ethanol. This increases the estimate to 5-7 years. Given we keep a sugar reserves.
Lets not get ahead of ourselves, At the end of the day, sugar and ethanol are both commodities, they will both be cyclical in the long run. No pricing power for the producers. Margins could come down sharply once we reach required production.
Now coming to the DCF part, projecting it out five years. Conservative margin should be 10-15% range going forward. Holding sugar revenue constant and Ethanol for a 20% blend Balrampur chinin for current market share would have a revenue of 7509 crore, Profit of 1126 crore. We should get a 17,000 crore valuation at 15 multiple. When will we reach this valuation is much harder to predict. Currently company market cap at 10,636. I have a small position in Balarampur Chini

Are we nearing the peak of the business and valuation cycle ?

We certainly have accomplished a lot since 2018 in sugar industry and investors have been rewarded a fair deal, so on the business cycle keeping new opportunities like bio plastics and export of ethanol out of the equation, we are in late cycle. In my humble opinion conservatively speaking 1-2 years left for investors to hit the eject button for ethanol play, but sugar seems to be done for now. if inventories keep on increasing. Valuation does not seem very high now, 15 is the median pe of the last 10 years, we at 24.6. Given TTM profit of 531, I’m buyer around 8000 crore Market cap. We will buying the sugar business at its Average Valuation, while not paying premium valuation for the ethanol hope case scenario.

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the only issue with the sugar industry is ethanol price being low… Govt is delaying because oil prices had come down. but now oil prices are expected to cross 80 and with USD/INR at 86-87, landed cost of petrol will be about 55-60. the govt will have to increase the sugar ethanol price. they still may not increase it - this will lead to sugar mills defaulting on farmer payments and lots of chaos after that… in all probability this may happen.
maize ethanol is already high causing maize prices to reach 24/25 per kg and grain ethanol plants not viable anymore. maize prices will reach 30/ kg by feb… international prices also increasing.
the whole ethanol-sugar-maize industry is in a mess. but govt cant control prices beyond a point or else it will lead to bigger problems.

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