Sugar:Higher volume+better realizations: Quarterly Preview

MUMBAI, 7 OCTOBER: Sugar mills are likely to report healthy growth in profitability, driven by better volumes for both sugar & ethanol and improving sugar realizations. After a sudden steep surge in sugar price in August, prices have retraced substantially due to continuous government intervention. We expect prices to inch up post crushing season and elections in Uttar Pradesh as SS26-27 production is expected to remain weak, physical sugar inventory build-up will take time and selling imported sugar will be viable above INR 48 per kg (due to freight and refining costs). Hence, we continue to have a positive outlook on the sector in the short-to-medium term.

Domestic quota for sugar sales up 4% in Q2: July and August sales quota was flat YoY at ~2.2-2.3mn tonnes but due to a sudden sharp surge in sugar price in August, Government mandated accelerated and higher sale of sugar in September to rein in surging sugar prices.  September sales quota was up 12.5% to 2.65mn tonnes, leading to cumulative total quota of 7.1mn tonnes in Q2 (up 4.4% YoY).

Ethanol volumes up 13% in Q2: OMCs have continuously maintained ethanol blending of 20% for this entire SS25-26. Consequently, ethanol sales volume for the industry is up 12.5% cumulatively for July and August.

Sugar output to go up in SS26-27; outlook unclear for SS27-28: India’s sugar production for SS25 -26 was ~ 28mn tonnes and may inch up to a maximum of 30-31mn tonnes in SS26-27. Sugar commodity traders are of the view that due to delayed rainfall in Pune, Nashik and Kolhapur, Adsali (18 month) crop acreage has been hit, which may have repercussions for SS27 -28 sugarcane production from Maharashtra and may take total India sugar production down to 27mn tonnes.

Sugarcane diversion to ethanol unlikely in SS26-27: Due to very remunerative sugar price, diversion of cane juice or B -heavy molasses to ethanol is completely ruled out (under normal circumstances) as sugar mills would want to maximize profitability by maximizing production of sugar. Only C -heavy molasses may be used for ethanol by the sugarcane industry. This will ensure maximum sugar production for India, which is the need of the hour. The share of sugarcane feedstocks in ethanol blending will further reduce from 31% to 6% in SS26 -27.

Outlook upbeat: Sugar prices will remain elevated for the next one year due to lower inventory and expectation of lower sugar production growth in the next two years. Balrampur Chini remains our top pick in the sector.

Report by: Prashant Biyani, ELARA CAPITAL

(Disclaimer: The information provided here is investment advice only. Investing in the markets is subject to risks and please consult your advisor before investing)

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