THE ROAD MAP OF SUGAR SECTOR
In June 2021, the government released a roadmap for ethanol blending
programme that clearly set forth all important factors & guidelines for OMCs,
auto OEMs, sugar and other related industries. We believe this depicts the
government’s seriousness to implement the programme. With increasing
molasses & grain based ethanol capacity, 10%, 20% ethanol blending by
2022, 2025, respectively, is achievable. The industry would divert 6 MT of
equivalent sugar toward producing ethanol. This would reduce the sugar
inventory to rational levels and drive domestic sugar prices upwards. We
expect sugar prices to move towards | 36-37/kg by September 2022.
Increasing global sugar prices to smoothen exports
Global sugar prices have moved up 50% in last one year on the back of two
consecutive years of lower sugar production by Thailand (major sugar
exporter). Moreover, despite ongoing Brazilian crushing season, sugar
prices have been firm considering expected 5-6 MT sugar production
decline due to severe drought & crop destruction due to frost in many areas
in south central Brazil. We expect global sugar prices to cross 20 cents/lb in
the next one year, which would help the Indian sugar exports to the tune of
6 MT in 2021-22 season. Sugar exports are important given industry wise
distillery capacities would take two years to get commissioned.
Improving profitability; attractive multiples
With the massive increase in distillery capacities by sugar companies,
ethanol sales are likely to double for most of our coverage companies. We
believe ethanol sales would contribute 25-30% to revenues of major sugar
companies by FY24. Moreover, reducing sugar inventories in the system are
likely to push domestic sugar prices upwards. Both these factors would
boost earnings for sugar companies in the next three years. We estimate 15-
40% earnings growth for our coverage companies. Despite, the huge run up
in the sugar stocks, valuation multiples are still 5-10x FY23 PE. Given the
strong earnings growth visibility, sugar stocks are likely to command higher
valuation multiples. We remain positive on the sector.
STOCKS WHICH WOULD HAVE BENEFIT
Balrampur Chini (BALCHI)
Dalmia Bharat Sugar (DALSUG)
Triveni Engineering (TRIENG)
Dwarikesh sugar (DWASUG)
Dhampur Sugar (DHASUG)
Avadh Sugar (AVASUG)