Sugar sector is not longer cyclical – it may be govt dependent but govt also cant make the industry unprofitable. One thing is for sure, that sugar companies will not add more ethanol capacity (due to the recent flip-flop on Govt. policy) . But more importantly optimise sugar and ethanol production – which will lead to higher margins. As per Shri Renuka Sugars (and other companies) – when sugar price is more than Rs. 37 per kg then sugar is more profitable than ethanol – so why will sugar companies make ethanol when ex-mill sugar prices are 39/ 40 – as supply of cane is limited.
Investors should look at companies which are focusing on cane development and recovery improvement (Balrampur, Dhampur Bio, Dwarikesh, Awadh…). Companies adding ethanol capacity are putting themselves in debt trap and lower margins – exactly opposite of what was happening a year back when companies with higher ethanol were being valued more. Ideally not more than 20% of revenue should come from ethanol.
Ultimately ethanol prices are linked to sugar prices and also with crude oil prices. Petrol prices in India will remain high for years to come as crude prices will remain above USD 80 per barrel and INR will depreciate year on year. There are some views that USD INR can go to 85 by March 2024. And also that govt is more concerned about diesel prices than petrol !!
From share price perspective – Over next 2 years, EPS of all UP based sugar companies will be least 25% to 40% of the mkt price – meaning balrampur mkt price is 400 today and cumulative EPS for next 2 years will be 90 to 100. Dhampur Bio mkt price is 150 and cumulative EPS for next 2 years will be 55.
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