Indian sugar industry- Can ethanol be a game changer?

Indian Sugar Industry-Can ethanol be a game changer?

June 13, 201910:17 am

Sugar has been a widely talked about sector, given the general election which concluded recently. While analyzing the Indian Sugar Industry, I felt I am late by six months but its better late than never. 

The kind of attention that the Indian sugar industry gets from politicians is because of the size of the sector. You can make a sense of that by understanding that India is the second largest producer and the largest consumer of sugar in the world. The scale of Indian sugar production impacts the global sugar industry. Also, coming to vote banks, about 5 crore farmers + their families are dependent on this sector.

The Indian Sugar industry is highly regulated. The industry’s fortunes are correlated with the mother nature(rains) and Indian govt’s policies. So, any investment in this sector should be actively tracked following news and policies surrounding it.

With the NDA govt coming with a greater majority, continuity in the Ethanol policy is expected. Otherwise, all the hard work and capital spend by both the govt and the industry will go in vain.


Indian Sugar Industry- Sugar Cycle

Indian sugar industry is highly cyclical as depicted in the image below. This cyclicality is in addition to natural ones. After every bumper sugarcane season, there were sops announced and post that things went to normal. But the NDA govt under the ‘Vibrant Ethanol policy’ is trying to incentivize the production of ethanol. This policy gained momentum since mid-2018 when the sugar prices dropped to a low of ₹27/kg and the 2019 general elections were around the corner. It might also be an effort by the govt of their promise of doubling farmers income by 2022. 

In order to end the ever repeating cycle, the govt is trying to artificially put a break to it by taking a number of steps which will make all stakeholders happy, be it Sugarcane farmers, Sugar mills and the govt itself. In terms of consumers, the increase in sugar prices doesn’t really have any impact whatsoever on the consumer monthly budget.

Earlier, the sugar mills were dependent on Sugar production as the only means of revenue & profit. Ethanol & power generation formed a very small part of the business. Now, with the govt incentivizing the industry via a number of policy support, the revenue streams are getting diversified and possibly can be a structural change in the Indian sugar industry with continued govt support.

Also, when there is govt push towards a sector, the size of the market grows exponentially.

Indian sugar industry- Can ethanol be a game changer?
Sugar Cycle. Source: KPMG report, my own analysis
Indian sugar industry- Can ethanol be a game changer?
Govt steps to help the Indian sugar industry

Few more point adding the image on the top of the steps taken by the govt to support the Indian Sugar Industry:

  1.  Earlier the prices of ethanol were decided on the basis of a tender. Now, it has been fixed.
  2.  The govt has de-linked the prices of ethanol from crude oil prices.
  3.  In the global market, the prices of Sugar is ₹10 per kg lesser than India. To encourage export i.e. to sell at a loss, the govt is providing subsidies to the sugar mills
  4.  Sugar mills are required to pay the farmers within 2 weeks of harvesting.
Indian sugar industry- Can ethanol be a game changer?
How govt steps is likely to break the sugar cycle
Indian sugar industry- Can ethanol be a game changer?
Sugarcane value chain
Indian sugar industry- Can ethanol be a game changer?
prices set by govt for different product in the value chain

Indian Sugar Industry- Ethanol

The prices of ethanol have been continuously increased.



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 25% 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 price which was at ₹150/MT last year has been increased to ₹3000/MT from 1st April 2019.

Realization from fuel ethanol is paid by Oil Marketing Companies(OMC) such as IOCL,HPCL, BPCL etc

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

Given that molasses is a byproduct, 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.

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

Indian Sugar Industry- Sugar

Indians have a sweet tooth. They are the largest consumers and second largest producer of sugar in the world.  Indian sugar industry’s growth is driven by GDP & population growth. In India, sugar consumption is around 26MT and is growing at 2 %. Of the total consumption in India, about 60% goes to the industrial application(Dairy, confectionary, baking, soft drinks etc) and the remaining 40% is used up by consumers.

Coming to its raw material, Sugarcane, is a water-intensive crop, perishable and can’t be transported to long distances. And 80% of sugar is produced in UP, Karnataka & Maharashtra. India has a market share of 15% of world production. Manufacturing sugar is a very straight forward process but highly capital intensive. Around half the ethanol is made in the northern state of UP.

Sugar season: Oct to April(Sugarcane is crushed)

The world has moved towards sugar surplus. So, excess capacity is increasingly finding its place in the manufacturing of ethanol.

Since sugar is produced only for a few month but consumed year long, working capital management is of prime importance.

There is something about which Sugar mills are still not happy. In terms of pricing of sugar by the govt, there is a mismatch as Sugarcane prices are determined by Minimum support/FRP price whereas Sugar prices were market determined to cause a very highly skewed dynamics. Globally, sugarcane prices are determined as a percentage of sugar prices. 

There is a simple math to calculate the future supply-demand scenario using the below formula which I learned during the research: 

Sugar surplus for any year is determined by using the formula(Expected sugar surplus for FY20)= Sugar production(FY19) – Sugar consumption(FY19) – exports (FY19) + Last year’s closing stock

                                       = 32.8MT-26MT-3.5MT+10.2MT =13.5MT

For FY20, the surplus is already 13.5MT which is more than 6 months of consumption. 

Indian sugar industry- Can ethanol be a game changer?
Sugarcane manufacturing process
Indian Sugar industry: Why is Sugarcane farmers' favorite?

Despite all the arrears, why is the area sown under sugarcane is increasing:

1. Sugarcane is a cash crop

2. It is a tough crop. Requires a lesser amount of fertilizers & pesticides.

3. Assured returns, minimum losses

4. Also, among other crops, sugarcane farmers are the most respected ones.

5. Robust, requires lesser maintenance, lesser labor intensive but needs larger land parcel.

Indian Sugar Industry- Power

Sugarcane waste(Bagasse) is also made use of and is used in power production. This power is used to generate steam for internal consumption as well as sold in the market. The current tariff is around ₹4.5/unit of power sold. 

UP govt has recently suggested a draft regulation to reduce power price by ₹2/unit. The industry is trying hard to fight this and the expecting if not zero reduction, it won’t be more than ₹1/unit. In case the price is dropped by ₹2, it will be a significant hit on the company’s power p&l.

In case the power rate goes down, the industry has the option to convert bagasse to pulp used in the paper industry.

For any sugar mill, integrated production is very important. The close proximity of sugar mills & distillery maximizes product utilization and reduces high transportation cost.

In other cane producing countries, ethanol is directly produced from sugarcane juice. In Brazil, the entire ethanol is made from sugarcane juice. 

The sector which has seen a turnaround in its performance owe it totally to the Indian government. As of now, the govt seems pretty serious about its target and let us see if there are any more incentive for the industry in the coming budget on 5th July 2019. 

If anyone wants to take a position in the sector, one needs to closely follow news around the sector. Farmers arrears are still high to the tune of ₹20,000-25,000 Cr and it is possible that there might be some more sops.

FY20 is expected to be deficit year for sugar. Maharashtra has sown 40% lower crop this year, implying there might be a positive upside for sugar prices along with other incentives.

If one is able to understand the cycle and keep a tab on the developments, can make a good amount of money. Veteran investor Anil Kumar Goel has made a huge bet on the sector, which has given him handsome returns.

There is some negative impact of such a massive push. It is likely that with remunerative prices, farmers are likely to increase the area under sugarcane, thus creating imbalance for other crops. Also, India is a water deficit country and since a lot of water is required for sugarcane growing, it might aggravate the problem further. And if the govt changes its policy for worse, it will bring the industry on its knees.

Indian sugar industry- Can ethanol be a game changer?
Indian Sugar Industry- Company comparison
Indian Sugar Industry- Key pointers to understand the sector

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
  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. 


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.


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