Govt allows sugar mills to use 6.7 lakh tons of B-heavy molasses for ethanol production; here is how analysts view the move

Sugar stocks NSE BSE: Major sugar companies' stocks such as Shree Renuka Sugars, Balrampur Chini, Triveni Engineering, Dhampur Sugar, Rana Sugar, EID Parry, and Dwarikesh Sugar Industries traded mixed in Thursday's (April 25) trade, a day after the government allowed sugar mills to use 6.7 lakh tonnes of B-heavy molasses as feedstock.

Last seen, individually, shares of Triveni Engineering & Industries were up over 2 per cent, Shree Renuka Sugars shares were up over 1 per cent, and Dhampur Sugar, EID-Parry, and Rana Sugar shares were up over half a per cent. 

On the other hand, Dwarikesh Sugar and Balrampur Chini shares slipped over 0.20 per cent. 

As per PTI, sugar mills were holding excess stock of B-heavy molasses, a byproduct of the sweetener, produced before the ban on its use on December 7 last year.

However, a week later, the government reversed the ban and allowed the use of cane juice and B-heavy molasses, but within the overall cap of a diversion of 17 lakh tonnes of sugar for ethanol production for the 2023–24 supply year (November–October).

"We have permitted sugar mills to use B-heavy molasses lying with sugar mills for ethanol. The same has been communicated to the Petroleum Ministry," the official told PTI.

This will be over and above the capped diversion of 17 lakh tonne of sugar for ethanol production in 2023–24, the official added.

Currently, sugar mills have a B-heavy molasses stock of 6.7 lakh tonnes, as per the state cane commissioners.

The move comes following the industry's representations to the food ministry to allow B-heavy molasses for ethanol production and improve the finances of the sugar mills.

The industry has stored B-heavy molasses for making ethanol after the crushing is over. But the government banned it suddenly and imposed a cap.

Sugar production is estimated to be between 315 and 320 lakh tonnes in the ongoing 2023–24 season, excluding the diversion of 17 lakh tonnes.

How do analysts view the move? 

Analysts at Incred Equities believe that the move is a basic clean-up of older molasses stock, and no major gains are seen for sugar companies or the ethanol blending programme. 

Yashovardhan Khemka, Senior Manager - Research & Analytics, Abans Holdings reckons that the recent authorisation to utilize 6.7 lakh tonnes of this molasses, in addition to the previous limit of 17 lakh tonnes on cane juice and B-heavy molasses, will enable the sugar companies to divert their current stock for ethanol production.

As per him, this redirection is anticipated to bolster the production of approximately 2.37 million tonnes of ethanol in the current supply year, which commenced in November.

Furthermore, as per Khemka, as B-heavy molasses is a significant byproduct of sugar processing, it will benefit all sugar companies, including Dhampur Sugar Mills, Balrampur Chini, Shree Renuka Sugars, Magadh Sugar, Uttam Sugar, Bajaj Hindusthan Sugar, Balrampur Chini, Dalmia Bharat Sugar, and Avadh Sugar. They will be able to divert B-heavy molasses for ethanol production, enhancing their liquidity profile by utilizing their inventory more effectively.

What should investors do? 

"We currently have a 'reduce' rating for the sugar sector, as grain ethanol companies will be dominating the ethanol-blending programme going ahead, in our view. Shifting from sugar-ethanol companies to grain-ethanol companies seems prudent, for investors within the ethanol space," said Nitin Awasthi, Analyst, InCred Capital.

Short-term spikes in prices can be used to exit the sector, as per InCred Equities.

Conversely, Abans Holdings' Khemka recommends investors stay invested in sugar stocks, as the projected surplus of sugar production compared to demand, along with the government's ambition to achieve ethanol blending targets, are expected to be supportive for the companies.

Sugar stocks' past performance 

Catch the latest stock market updates here. For all other news related to business, politics, tech and auto, visit Zeebiz.com.

DISCLAIMER: The views and investment tips expressed by investment experts on zeebiz.com are their own and not those of the website or its management. zeebiz.com advises users to check with certified experts before taking any investment decisions.