The current quarter for the Indian Sugar industry can not be considered to be a good one. I have in all my previous blogs on the industry have cautioned of the risk faced by the industry from the govt policies as each and every aspect is decided by the govt. I will explain in more details in the blog ” Indian Sugar Industry: Q2FY20 Update “
In the current quarter, while Central govt held on to its policies, the state govt of Uttar Pradesh(UP) played the spoilsport.
Other than that, the molasses prices are seeing a surge given the rapid expansion distilleries made to make ethanol.(Molasses is used as a raw material for ethanol) Also, red rot which is a very dangerous disease and spread very rapidly in sugarcane plants has started surfacing in some areas UP. Although it is in its initial stages, if not tackled properly, it spreads fast.
Because of rains/floods in Maharashtra and Karnataka, the output of sugar is estimated to drop to 26 MnT for Sugar Season(SS20) from an earlier estimated level of 32.7MnT. That would support sugar prices but causes scarcity of molasses.
Indian Sugar Industry: Q2FY20 Update
These are the changes brought about by the state govt:
- UP govt reduced the prevailing power tariffs of ₹5-6 /unit by ₹2.25/unit obtained from co-generation facilities of sugar mills i.e. a drop of about 35-40%.
- The reduction in power tariff which came in effect by around the end of July is to be applicable retrospectively from April 1st, 2019. (Seems like Indian govts love the word retrospective)
- The govt also declared the cost of bagasse(sugarcane waste from which power is produced) to be ₹1000/ tonne as compared to ₹1800/tonne as claimed by sugar mills.
- Fixed Quota of molasses to be sold to distilleries making Extra neutral alcohol(Country liquor).
Balrampur Chini Mills Ltd
Balrampur Chini Mills Ltd was the best performer among the lot. The EBIT margins of sugar business improved whereas the other two-segment saw a drop. The improvement in terms of Sugar business was on account of increased sugar prices which is currently at around ₹33.5/kg.
The sugar revenue was lower on account of monthly release quota specified by the central govt which is fixed for every month.
The much-awaited Gularia distillery will commence production 15 days prior by 15th December 2019. This plant will make ethanol only from B heavy molasses and is expected to run at 100% utilization level within a week.
The reduction in power tariff from ₹4.82/unit in Q1FY19 to ₹3.13/unit in Q2FY20 for the company was on account of a reduction in power tariff.Indian Sugar Industry: Q2FY20 Update
Dhampur Sugar Mills Ltd
Dhampur Sugar Mills Ltd was the worst performer of them. It’s sugar revenue increased on the back of additional quota given by the govt on account of them producing ethanol from B heavy molasses. But, surprisingly the sugar margins were much lower than its peers. In the concall, the management does not give a clear answer.
The most shocking was the Distillery(Ethanol) EBIT margins, it dropped from a level of 35-40% to 10.6%. Although the EBIT margins are lower for ethanol made from B heavy molasses, the drop to around 10% was quite significant. The management mentioned the reason being that the transfer pricing of molasses which stands at ₹500/quintal in Q2Fy20 compared to ₹20/quintal YoY. They expect the EBIT margin for ethanol to be below 25% for the coming quarters whereas the transfer pricing used for Balrampur Chini stood at ₹300/quintal. The difference is quite large (Seems outside procurement to be the reason)
Also, since Balrampur has a higher sugar crushing capacity and lower ethanol capacity compared to Dhampur, Balrampur is able to meet all the molasses need inhouse as of now whereas for Dhampur sugar, they need to buy almost 60% of molasses from outside thus increasing the cost.
To take advantage of the country liquor rule made by UP govt, the Dhampur management has decided to to make about 3cr litre of alcohol at their plants.
Avadh Sugar & Energy Ltd
Avadh Sugar did well on the sugar front but has been a laggard on the most lucrative ethanol business. The proposed expansion of their distillery is still some distant away.
Their co-generation business was the worst affected due to the policy change.
Indian Sugar Industry: Q2FY20 Update
With respect to the UP govt’s reduction in power tariff and implementation of that retrospectively, UP’s sugar mills have filed a case against the govt in the high court, of which first hearing is already done. Since any solution that comes out of the courts takes a lot of time. So, it would be wise not to keep any expectation for the next 1-1.5 years.
Bagasse which is used to make electricity(by burning them), can also be used to make paper. This alternative seems better remunerative as compared to producing power now. So, sugar mills are now planning to sell bagasse directly to paper mills.
Having done so much analysis and trying to understand the sector, I can certainly say it is a very difficult sector to invest in. There are so many variables and that too changing quite rapidly.
A few things that I have understood by analyzing the Indian sugar industry is what does quality business mean- Consistency and predictability of earnings. That is the reason most investors shy away from touching this sector where things keep changing on a daily basis.
Another learning is to invest in top companies in such sectors. Never invest just by researching one company. Given that Balrampur and Dhampur are the best names, one should stick to them only.