With the government’s aggressive stance on increasing ethanol blending with petrol to levels of 20 per cent by 2025, the industry is undertaking huge capacity expansion programmes to meet the ethanol requirement of 10 billion litre by 2025.
Analysts at ICICI Securities believe this distillery capacity addition to utilise the B-Heavy & sugarcane juice route to produce ethanol, would be earnings accretive after the significant increase in ethanol prices in last two years. Also, higher sugarcane diversion towards ethanol production would keep sugar inventory levels in check, significantly de-leveraging industry balance sheet, the brokerage firm said.
The sugar economy has improved significantly in the last two years with increase in sugar production aided by better sugarcane yield & sugar recoveries (prevalent use of sugarcane variety CO-0238). Further, implementation of minimal selling price (MSP) for sugar, export subsidy, diversion of sugarcane for ethanol production through B-heavy & sugarcane juice route have helped in rationalisation of inventory.
Analysts believe the industry would be able to sacrifice 5-6 MT (equivalent of sugar exports) of sugar for ethanol production in the next two to three years. This would help the industry to reduce sugar production to the level of sugar consumption in the country, which would keep sugar inventory at rational levels and, in turn, result in higher domestic sugar prices.
Among individual stocks, Balrampur Chini Mills
hit a new high of Rs 259, up 9 per cent on the BSE. In the past three months, the stock rallied 40 per cent, against 2 per cent decline in the S&P BSE Sensex.
On Saturday, April 10, the company’s board approved the revised capex of Rs 425 crore for the 320 KL per day (KLPD) distillery plant which was earlier approved at Rs 320 crore by the board on November 4, 2020.
The higher investment would result in higher efficiency, better recovery of ethanol from juice which will add to the bottom line and will result in better payback than envisaged earlier. The plant which is expected to be commissioned by December 2022 would operate on dual fuel i.e. on sugarcane juice during the season and on grains during off season. The plant is expected to generate annual revenue of around Rs 650 crore and has a cash pay-back period of less than 4 years, the company said.
Meanwhile, rating agency ICRA revised the outlook on the long-term rating of the company from 'stable' to 'positive'. The rating action considers an expected improvement in Balrampur Chini Mills’s operating profitability and debt coverage indicators in FY2022 on the back of higher B-heavy ethanol sales volumes and an expected stable sugar realisation. In Uttar Pradesh (UP), sugar production is estimated to decline by around 20 per cent in SY2021, which is likely to support sugar prices in the near term.
Also, with continued higher diversion of cane towards B-heavy molasses, there is likely to be an increase in the sales volume of B-heavy ethanol, having better realisation, thus increasing the overall revenue and profits from the distillery segment, it said.
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