The clarity on ethanol blending policies and the full utilisation of distillery capacities by sugar mills are expected to drive strong earnings growth for sugar companies from Q3FY25 and also result in sector re-rating, DAM Capital said in a report. The brokerage maintained its "Buy" recommendation for larger sugar companies such as Balrampur Chini Mills, Triveni Engineering, and Dalmia Bharat Sugar.
The government's recent decision to lift restrictions on ethanol production from sugarcane juice and B-heavy molasses routes is likely to drive up ethanol prices before the new season begins, DAM Capital said.
In a notification, issued by the Ministry of Consumer Affairs on August 29, the government announced that ethanol can now be produced from all available feedstocks, including sugarcane juice, B-heavy, C-heavy molasses, and grains. Additionally, sugar mills and standalone distilleries are now permitted to procure up to 2.3 million tonnes of rice from the Food Corporation of India (FCI) for ethanol production. This move marked a reversal of policies imposed in December 2023, which had restricted ethanol production from these routes due to rising sugar prices in the lead-up to the 2024 general election. These changes, according to DAM Capital, are expected to reinvigorate the ethanol blending program for the 2024-25 season.
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The current sugar inventory in India is projected to exceed 8 million tonnes as of October 1, well above the minimum requirement of 5 million tonnes. With gross sugar production expected to remain at 32 million tonnes, surpassing the consumption rate of 29 million tonnes, there will be a surplus of over 5 million tonnes available for ethanol production. DAM Capital estimates that approximately 4-5 million tonnes of sugar will be diverted towards ethanol production, sufficient for the production of 4.5 to 5 billion litres of ethanol. This development is expected to allow sugar companies to fully utilise their distillery capacities, which have been underutilised at around 60-70 percent due to feedstock restrictions last season.
The report also said that it will improve the economies of grain-based ethanol. The availability of FCI rice for ethanol production, coupled with sufficient molasses supply, is expected to enhance operating margins for grain ethanol, projected to reach 10-12 percent. "We believe grain ethanol economies would improve significantly from 2024-25 procurement year," the report said.
Given the current inventory levels and the anticipated increase in distillery utilisation rates, DAM Capital is optimistic about larger sugar companies. The brokerage identified Balrampur Chini Mills as a strong performer, estimating that it will produce 320 million litres of ethanol/ENA (Extra Neutral Alcohol) by FY26 through its distillery operations.
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Triveni Engineering is also expected to benefit from higher sugarcane crushing following the acquisition of a new plant in western Uttar Pradesh last year. The report estimates Triveni Engineering's distillery volume to reach 220 million litres by FY26. Meanwhile, Dalmia Bharat Sugar is expected to fully utilise its grain distillery, producing an estimated 220 million litres of ethanol by FY26.
However, Dwarikesh Sugar is likely to face challenges due to a lack of sugarcane availability in its catchment area, attributed to red-rot disease. This caused DAM Capital to maintain a "Sell" recommendation for the stock.
At 10 AM, Dalmia Bharat shares traded 2 percent higher. Meanwhile, shares of Balrampur Chini Mills, Triveni Engineering, and Dwarikesh Sugar were down 0.7-1.0 percent.
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