ethanol game changer

Indian Sugar Industry-Can ethanol be a game changer?(Part2)

June 24, 20191:25 pm

Indian Sugar industry has got a lot of attention because of the govt focus towards increased usage of ethanol made from sugarcane in petrol & diesel. Since the length of the blog got a bit longer, I have created 2 blogs to cover the entire industry.

I would suggest you to first read: Indian Sugar Industry-(Part-1)

Indian Sugar Industry- Ethanol

To begin with, let me give you a brief about what is Ethanol. In addition to other uses, Ethanol is used to blend with fuel(petrol or diesel), to enhance cleaner burning as well as reduce fuel import. It can be made from sugarcane juice or molasses.

The prices of ethanol have been continuously increased by the govt.

Link1

Link2

India currently has a blending level of 4-5% ethanol with petrol. The govt targets to take this level to 10% in the next 2 year and to 20% by 2030.  But the problem/opportunity lies here, that only about 25% sugar mills in India have a distillery. And these distilleries are equipped to manufacture ethanol from only C-heavy molasses.  The reason being that as per the Sugarcane Control order of 1966, ethanol could be made only for C heavy molasses since it was believed that diverting a food crop for producing fuel will create a shortage of sugar in the country. This order was amended in 2018 and making ethanol was allowed from B heavy molasses as well as sugarcane juice, which has a greater amount of sucrose content.

Conventionally, Sugar is extracted in 3 stages, after the first stage you get sugarcane juice,  the second one we have is B heavy molasses and usually, sugar extraction is stopped post this. The left over for the 3rd stage is C heavy molasses. 

The thrust has been on manufacturing ethanol from sugarcane juice as it gives 100% ethanol compared to a mix of ethanol+sugar in the 2 types of molasses.

Brazil has a blending mix of 30% with petrol. In US the mix is 10-15%.

The only saving point with respect to distilleries is that the current distilleries can be modified to manufacture Ethanol from B-Heavy molasses as well as sugarcane juice at a marginal cost.

With this small number of ethanol distillery as well as capacity constraint of ethanol-producing distillery in India, the blending level can only be reached to around 6-7%. A lot of capital expenditure is required to enhance capacities. Since molasses is a byproduct, for every liter of ethanol produced, the sector produces 10 liters of effluents. Also, with new stricter environmental norms, the new facilities need to have Zero liquid discharge.(Larger players will be better placed to have environmental clearance)

Since only 25% of sugar mills have distilleries, other mills not having the distilleries sell the molasses to the ones having it. Molasses transfer price which was at ₹150/MT last year has been increased to ₹3000/MT from 1st April 2019.(It keeps varying depending on the market conditions)

Realization from fuel ethanol is paid by Oil Marketing Companies(OMC) such as IOCL,HPCL, BPCL etc. It is done on the basis of annual contracts.

Benefits of  manufacturing ethanol from sugarcane:

1. Curbs crude oil import bill(Currently India imports about 80-85% oil requirements, leads to current account deficit).  In a way, it is much better to pay Indian farmers & millers via subsidies rather than paying crude oil import bills.

2. Ethanol is a cleaner fuel, thus reducing pollution

3. Helping Indian millers stabilize their business and improve profit margins

4. Helping Indian farmers increase their income

5. Divert the excess sugarcane production

Since, molasses is a left over after sugar extraction, the cost of raw material becomes zero for the distilleries. They might have to pay a higher amount for sourcing molasses from other mills for the current year FY20.

In order to show you the impact of ethanol production on the company’s profitability, let us have a look at the financial performance of Avadh Sugar for Q4FY19 & FY19. For FY 19, the sales from Ethanol contributed to 10.72% whereas EBIT contribution was 56.6%. The latest price hike was taken in mid-sept 2018(when almost half of FY19 was over). Keeping everything constant, the profitability, as well as revenue growth for FY20, is expected to be robust. ethanol game changer

Good pointers to understand the ethanol business: Link

Indian sugar industry- Can ethanol be a game changer?
Avadh Sugar & Energy financials

Prices set by state & central govt across Sugar value chain

Prices set by govt for different product in the value chain(Data updated as on 23rd Sept 2019)
ethanol game changer
Revenue from Ethanol production & corresponding margins

Distillery capacity of Indian Sugar Mills

Indian Sugar Industry-Distillery capacity (As on 23rd September 2019)

The key to understanding the sector is:

  1. Prices of raw material is fixed(Fixed sugarcane price)
  2. Price of end product i.e Sugar is fixed(Minimum selling price)- If lower rainfall, it implies higher prices for sugar and is a good sign for these companies.
  3. Price of end product i.e. ethanol is fixed

It is left to the company how they manage their working capital, inventory & debt. Also, how well integrated are the company’s facilities. Now, with Ethanol prices going up, it is important to know the capacities of these plants. 

4. Since everything is determined by the govt, implying the fate of the sector is in govt’s hand. This is the  most important & you can never anticipate is what govt is going to do next.  

The biggest problem with any sector dependent on Govt policies is you never know when the govt change its policy. And it has happened time and again. Be it the renewable energy sector or be it other similar sectors where govt gave its push. 

ONE NEEDS TO BE VERY CAREFUL WHILE TAKING ANY LONG TERM INVESTMENT POSITION IN THE SECTOR. SUCH SECTORS ARE IDEALLY SUITED IDEALLY  FOR SHORT to MEDIUM TERM INVESTMENT.

Ethanol game changer

author-avatar

Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

6 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *