Cover Story

Published: May 31, 2022
Updated: May 31, 2022

Market Crash, Where Will It Go From Here?

The country's sugar industry, so crucial to the economy as well as to millions of Indian farmers, workers and consumers, has been a laggard in terms of growth as compared to other key sectors like steel, cement and consumer goods.

Hitherto tight government controls have had a negative impact on shares of sugar companies, and even the deregulation recommendations of an expert panel a decade ago have remained largely on paper. However, there is now a growing recognition from all stakeholders that freeing the sugar sector from all manner of controls cannot be put off any longer.

What is more, the government's thrust on petrol blended with molasses by-product ethanol has come as a shot in the arm for the industry.

Notwithstanding the recent reactionary fall in sugar stocks in the wake of the restrictions imposed by the government on sugar exports, prospects for the Rs 85,000-crore sugar industry are highly promising - and more so in the long run.

All said and done, for India, which is the second largest producer of sugar in the world after Brazil and the number one consumer of the sweetening agent, the sugar industry is hugely important. After all, it is a source of livelihood for about 50 million sugarcane farmers and over half a million workers directly employed in around 735 sugar mills across the country. These mills have a combined sugarcane crushing capacity for the production of around 340 lakh mt of sugar per year.

Though the sugar industry in India is very old and large, it has failed to make rapid strides despite the fact that sugar is a commodity of daily consumption. This is due to strict state controls on almost every aspect of the business - right from the purchase of sugarcane, the main raw material, to how much each mill can sell in the open market. What is more, even selling prices have traditionally been regulated. These severe, regressive and politically motivated policies have literally drained the 'sweetness' from the industry, which has not been able to progress as it should have and in the process make sugar company stocks attractive. These controls have killed the operational efficiency of sugar mills and their desire to grow in line with other industries like steel, cement and FMCG.

Says an expert on the industry, the Indian sugar industry has never stood on its feet. The government's debilitating controls and populist policies, often devoid of economic sense, ensured that it could not even attempt to do so. Mindless sugarcane pricing triggered the sugar cycle which ensured that the country oscillated between massive surplus and severe shortage. The government grappled with large cane arrears while the industry survived on periodic government funded bail-outs and subsidies. No sane investor chose to bet his money on this sector.

That may well change soon if some of the recent measures announced by the government are any indication. In fact, Indian sugar industry is at the cusp of becoming financially independent and globally competitive

It all began in 2013 when the government chose to decontrol the sector. It was not a comprehensive exercise. The decontrol focussed on the sugar side of the business. It allowed sugar mills to sell whatever quantity they wanted at a time and price of their choice. Supply of levy sugar at discounted prices to the government for distribution through PDS was also ended. However, the controls on the sugarcane side remained and it continues even today. This includes the contentious issue of government fixing the price of sugarcane. The decontrol did not help much as the sugar cycle continued to play out and industry's woes refused to go away.

Help then came from an unlikely quarter. In 2016-17, a new variety of sugarcane (CO 238) was developed for use in Uttar Pradesh (UP). To everyone's amazement, it delivered significantly higher yield (30 tonne per acre against 22 tonne from earlier varieties) and even higher recovery (sucrose content was 11.5 per cent as against earlier 9.5 per cent). Considering that UP produces bulk of India's sugarcane, its share in the country's sugar output rose to 40 per cent from 25 per cent. This singular development effectively broke the sugar cycle and made India a consistently surplus sugar producer.

Today, production exceeds domestic consumption by 60 lakh tonne and the focus has shifted to managing the surplus. The government re-introduced monthly sale quota and fixed minimum selling price for sugar to ensure the cash-strapped sugar mills do not flood the domestic market with sugar. That kept the local prices stable. To liquidate excess stock of sugar, it announced export subsidies. Without subsidies Indian exports are unviable as cost of producing sugar (thanks to high cane price) is way above the international sugar price. This was promptly contested by other countries in the WTO. India has been allowed to continue with the subsidies till December 2023. The fear is what will happen post-2023.

RANGARAJAN PANEL

However, new winds have been blowing in the corridors of power. With the government realising that excessive state controls have throttled the sugar industry, an environment of decontrolling the industry is being created in the country. In this connection, fiscal 2013-14 proved to be a watershed for the sugar industry with the setting up of an expert committee headed by C Rangarajan, the then Chief Economic Advisor to the government. The Union government favourably condered the recommendations of the Rangarajan committee on deregulation of the sugar sector and decided to discontinue the system of levy obligations on mills as well as to abolish the regulated released mechanism on open market sale of sugar. The committee insisted that deregulation would improve the financial health of sugar mills, enhance cash flows, reduce inventory costs and also lead to timely payments to sugarcane farmers. However, the recommendations of the committee relating to cane area reservation, minimum distance criteria and adoption of the cane price formula were left to state governments for adoption and implementation as considered appropriate by them. So far, states have mostly refrained from taking any action on these recommendations.

But all stakeholders have realised that the remaining controls on sugar industry will have to go tomorrow, if not today. This feeling has added new life to sugar shares and investors who preferred to keep away from these stocks have started taking interest in them. What is more, the government is just one step away from making the industry independent and self-reliant.

GAME CHANGER

In other words, the sugar industry is gradually coming into its own. At this juncture, a major game changer has come up in the form of ethanol-blended auto fuel, which will revolutionise the future prospects of the industry.

Ethanol is mainly produced from a byproduct of the sugar industry; viz., molasses. The government is keen on blending of ethanol with petrol for the following reasons: reducing pollution, conserving foreign exchange by bringing down the imports of crude oil, increasing value addition in the sugar industry, thus enabling sugar companies to solve their financial problems, including the clearing of the cane price arrears of farmers, and turning the sugar industry profitable.

Though the ethanolblended petrol programme has been around since 2007, subsequently the government decided that the procurement price of ethanol will not be fixed by the Centre and will be decided between the oil marketing companies and sugar mills. In 2012-13, the Union Ministry of Petroleum and Natural Gas made 5 per cent ethanol blending mandatory. Thereafter, this limit was doubled to 10 per cent. Going a step further, in 2015- 16 the excise duty on ethanol supplies to oil marketing companies was waived. Ethanol supplied for blending with petrol started rising and shot up from 380 million litres in 2014-15 to 670 million litres in 2015-16, going on to cross the 1,000 million-litre mark within the next two years.

Going a step further, in order to enhance the production of ethanol, the government allowed sugar mills to convert heavy molasses (which can be converted easily into sugar) into ethanol and then allowed mills to produce ethanol directly from sugarcane. As these measures would lead to a drop in sugar production, the government allowed an increase in ethanol prices to compensate the mills. In the fiscal 2020 sugar season, 8 lakh tonnes of what would have been sugar output was converted in ethanol. In the sugar season 2020- 21, it was estimated at 20 lakh tonnes. Interestingly, the plan is to convert the entire sugar surplus - accounting for around 60 lakh tonnes - into ethanol in the next 2- 3 years. Incidentally, this will save the government a lot on account of sugar export subsidy. Thus, the sugar industry has turned jubilant as its days of financial difficulties are largely over as it has started earning substantially from the sale of ethanol.

BLENDING TARGET

In fiscal 2021, the first ethanol blending target of 5 per cent was met, which went up to around 8 per cent in the sugar season 2022. The government has set a target of 20 per cent to be achieved by 2030.

Now, the latest development is that the government has decided to advance the ethanol blending target of 20 per cent blending of ethanol with petrol from 2030 to 2025. The decision will promote production of biofuels in the country under the 'Make in India' programme by units located in special economic zones (SEZ) and export oriented units (EoUs). New members will now be added to the National Biofuel Coordination Committee as per a government statement. The amendment also allows granting of permission for export of biofuels in specific cases.

The National Policy on Biofuels, 2018, was notified by the petroleum ministry on June 4, 2018, in supersession of the National Policy on Biofuels promulgated through the Ministry of New & Renewable Energy in 2009.

The statement said amendments have been brought about due to advancements in the field of biofuels, various decisions taken in the National Biofuel Coordination Committee (NBCC) meetings to increase biofuel production and recommendations of the standing committee, and the decision to advance introduction of ethanol-blended petrol with up to 20 per cent ethanol throughout the country from April 1, 2023.

THE SPIN-OFFS

The move will foster development of indigenous technologies which will pave the way for the 'Make in India' drive and thereby generate more employment, according to the government.

The amendments are expected to reduce import of petroleum products with the generation of more biofuels. Since many more feedstocks are being allowed for production of biofuels, it would help India achieve its aim of 'energy independence' by 2047, the statement said.

With increased production and sale of ethanol and rising demand for sugar, sugar companies have started doing very well on the financial front. What is more, sugar stocks which had been friendless all these years have started seeing keen interest among the investing public.

With growing investor interest, sugar stocks have started stealing the limelight. Here are five sugar stocks worth buying by discerning investors:

Balrampur Chini

FACE VALUE:  01
CMP:  404.50
52 WEEK HIGH /LOW:  525/294

The UP-based Balrampur Chini Mills is among the top three sugar companies in the country with a capacity of 75,500 tonnes of cane crushed per day. The company also has a large distillery and cogeneration operations of 320 kilo litres per day and 126 MW power. This makes it less vulnerable to falling sugar prices.

The company can boast of one of the strongest balance sheets in the sector with an enviable debt-equity ratio of 0.63. Huge capacity, strong management, a healthy balance sheet, low debt and an attractive valuation (available around 16 PE ratio) make this stock worth buying for attractive returns.

The company is steadily going from strength to strength on the financial front. During the last five years, its sales turnover has grown from Rs 4,342 crore in fiscal 2018 to Rs 4,846 crore in fiscal 2022, with the profit at net level shooting up from Rs 221.12 crore to Rs 514.66 crore during this period. The company's financial position is very strong, with reserves at the end of March 2022 standing at Rs 2,738 crore against a tiny equity capital of Rs 20.40 crore. And this is after as many as four bonus issues of 1:1 in 1990 as well as 1992, 6:5 in 1994 and 3:2 in 1996. The company has been paying regular and handsome dividends, the rate for the last few years being 250 per cent.

Shree Renuka Sugars

FACE VALUE:  01
CMP:  52.55
52 WEEK HIGH /LOW:  63/15

Shree Renuka Sugars is one of the largest sugar producers and sugar refineries in the world. The company operates seven sugar mills in India with a total cane crushing capacity of 7.1 mtpa and two refineries with a capacity of 1.7 mtpa. Thanks to rising prices of sugar at home as well as abroad and the rising use of ethanol in mixing with petrol, the company has significantly grown on the financial front. During the last five years, its sales turnover has advanced from Rs 5,848 crore in fiscal 2018 to Rs 6,126 crore in fiscal 2022, earning a net profit of Rs 113.10 crore in fiscal 2022 in striking contrast to a huge loss of Rs 2,735 crore in 2018. The company's financial position is steadily improving, with reserves at the end of March 2022 standing at Rs 334.20 crore against its equity capital of Rs 212.80 crore. The company had issued bonus shares in the ratio of 1:1 in 2010 and has been paying good dividends, the rate for the last three years being 100 per cent.

EID Parry

FACE VALUE:  01
CMP:  538.40
52 WEEK HIGH /LOW:  576/377

A part of the illustrious Rs 370 billion business group of Murugappa of south India, it is a leading manufacturer of sugar and neutraceuticals. The 234-year-old company holds the distinction of setting up India's first sugar plant at Nellikuppam in 1842. Today, it has 9 sugar plants spread across south India with a total cane crushing capacity of 43,400 tonnes, a cogeneration capacity of 160 MW and a distillery capacity of 234 klpd. The company has a leading subsidiary in Coromandel International, a renowned manufacturer of fertilisers.

The company is going from strength to strength on the financial front. During the last five years, its sales turnover has expanded from Rs 1,921 crore in fiscal 2018 to Rs 2,496 crore in fiscal 2022 with the profit at net level shooting up from Rs 101.01 crore to Rs 283.50 crore during this period. The company's financial position is very strong, with reserves at the end of March 2022 standing at Rs 2,742 crore - over 154 times its tiny equity capital of Rs 17.77 crore. Though the company has not made any bonus issue so far, it has been paying handsome dividends, the rate for the last two years being 550 per cent!

Triveni Engineering

FACE VALUE:  01
CMP:  290.45
52 WEEK HIGH /LOW:  375/146

Triveni Engineering is a leading conglomerate with diversified businesses in agriculture and engineering. With 17 worldclass facilities, the company is a market leader in sugar, ethanol & alcohol, power transmission and water treatment solutions in India. In addition to this, it owns and operates several FMCG brands (Shagun, GermCare and SuperGuard) that bring extremely high-quality products to the Indian consumer.

The company has integrated operations to produce sugar, ethanol and power. Its association with the sugar industry goes back to the 1930s. Using agile methods and tech-advanced manufacturing solutions in the alcohol business enables it to produce multiple high-quality product

The company has made rapid strides on the financial front. During the last 12 years, its sales turnover has expanded from Rs 2,259 crore in fiscal 2010 to Rs 4,677 crore in fiscal 2022, with the net profit surging from Rs 70 crore to Rs 424 crore during this period. The company's financial position is very strong, with reserves at the end of March 2022 standing at Rs 1,889 crore - over 78 times its equity capital of Rs 24 crore. The company made a 3;2 bonus issue in 2005 and has been paying dividends regularly, with the rate for the last year being 200 per cent.

Dalmia Bharat Sugar

FACE VALUE:  02
CMP:  388.00
52 WEEK HIGH /LOW:  570/306

Dalmia Bharat Sugar and Industries entered the sugar business in the mid-1990s, with the first unit of 2500 TCD being built in Ramgarh, a village in Uttar Pradesh's Sitapur district, in 1994. Coca-Cola, PepsiCo, Mondelez, Perfetti, Britannia, Wal-Mart India, Dabur, D-Mart, India Glycols Allied Blenders & Distillers, United Breweries, Carlsberg, SABMiller, and many more in the alcohol industry use the company's sugar as a preferred supplier.

It also sells to Indonesia, Malaysia, Bangladesh, Sri Lanka, Nepal, Bhutan, the Middle East, Mediterranean countries, and East Africa, among other places. Dalmia Bharat Sugar and Industries Ltd (DALMIASUG) was successful in generating YTD returns of 127.45 percentage based on the market-cap change from 11.65 billion to 26.52 billion during the given months of the year 2021 and the share price change from 143.9 per share to a price of 327.3 per share as of May 18, 2021. Today it is quoted around Rs. 1375

BUY AT DECLINES

Prices of sugar stocks were on the high side till recently. But thanks to the government imposing restrictions on sugar exports, share prices of these stocks have fallen sharply. The share price of Balrampur Chini has tumbled from around Rs 1,483 to Rs 1,393, that of Shree Renuka Sugar has nosedived from Rs 53 to Rs 44 and that of Triveni Engineering has slipped from Rs 338 to Rs 266. The stock of Dalmia Sugar has lost ground from Rs 530 to Rs 385.

Looking at this scenario, investors would do well to to buy these sugar stocks at declines. Future prospects of these stocks are quite promising.

Vital statistics of leading sugar companies