Systematix Institutional Equities in its latest strategy note said India’s sugar industry bore the brunt of government’s policy flip flop in the wake of general elections 2024. This, it said, caused input costs to surge, unsold sugar inventory to pile up, ethanol sales volumes to slip and capacity utilisation to shrink.
With ISMA’s revised estimates pointing to 8.85 million tonnes of sugar surplus, Systematix said it is confident the government would relax its restrictions on the use of juice or B-Heavy molasses for the next season. It expects higher diversion of cane to ethanol and could therefore see upward revisions to our FY25 ethanol volume numbers.
"Also, a positive outlook on monsoons (IMD forecasts a normal rainfall this year) could aid sugarcane cultivation. Millers carried higher sugar inventory as of 31st March 2024, which impacted their working capital, resulting in higher interest expense. This too should improve over the next few months, as inventory is already being liquidated," it said.
The brokerage sees a significant improvement in millers’ operating performance in sugar season 2024-25. It has retained its positive stance on the sugar sector with a BUY rating on Balrampur Chini Ltd, Triveni Engineering Ltd and Dwarikesh Sugars Ltd. It also maintained its 'Buy' on Praj Industries Ltd, it said, adding that Balrampur Chini is its top pick.
Add to that, the brokerage said, was erratic monsoons and red rot disease in some parts of the country that impacted yields, hurting profitability of millers in 4QFY24.
"The fallout of all this was that profitability in the distillery segment took a beating, as volumes plummeted (19 per cent YoY) and lower plant utilisation impacted margins due to changes in feedstock mix. Sugar segment profitability remained muted, as lower sugar sales volumes (down 25 per cent YoY) led to government reducing the sugar release quota and halting exports. However, firm sugar prices (up 6 per cent YoY to Rs 38 per kg) offset the decline and caused YoY EBIT per tonne to improve," said Systematix.
With elections done, it expects a clarity to emerge with respect to ethanol feedstock usage and prices. Systematix believes the government is committed to achieving 20 per cent blending target and the change in ethanol policy is a blip.
In the case of Balrampur Chini, the brokerage expects improved cane availability and yields to drive ethanol and sugar volumes, and expects realisations in both to stay firm, anticipating normal monsoon and agroclimatic conditions.
On Dwarikesh, the management is optimistic of good crushing numbers in the upcoming season, as improved varietal mix and better monsoon would ensure adequate cane availability. It also expects the likely revision in sugar prices from June 2024 to benefit the company, as it can then sell its large sugar stock at higher prices.
For Triveni, it has trimmed its FY25 Ebitda/EPS estimates by 9 per cent/12 per cent to factor in the lower sugar volumes and higher costs.
Margins for Praj Industries may continue to improve on the back of benign raw material prices and rising exports, it said.