For the Q2 period, sugar companies on the back of several challenges such as government arbitrarily banning the use of juice/B-Heavy molasses to produce ethanol, which restricted the availability offeedstock, resulting in lower ethanol production, higher raw material (sugarcane and maize prices) and off-season expenses, and lower cane availability, given the higher incidence of red rot and weak monsoon in 2023 and nil cane crushing
resulting in lower absorption of fixed costs.

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Likewise, companies in the space posted a weak 2QFY25, with revenue/EBITDA/PAT falling 3 per cent /44 per cent/27 per cent respectively.

Also, profitability in the distillery segment took a hit by 79 per cent on-year as volumes also eroded by 28 per cent and lower plant utilisation impacted margins due to changes in the feedstock mix.

Nevertheless, sugar or ethanol realisation at 2 per cent and 4 per cent, respectively, were the only positives in the otherwise disappointing quarters.  Sugar realisations stood at Rs 38.5 per kg on the back of lower quota allocation. 

Furthermore holding an optimistic view on the sector, Systematix based its positive bias on the space on 6 key factors as the new sugar season begins

  • better cane availability on good monsoons
  • higher feedstock (juice/B-Heavy molasses) availability to produce ethanol, as more cane would be crushed,
  • government permitting the use of any feedstock (juice, B-Heavy molasses, rice, etc.) to produce ethanol,
  • likely 4-6 per cent increase in ethanol prices,
  • likely Rs 3-4/kg increase in sugar minimum support price (MSP), whereby sugar prices may stay firmly above Rs39/kg, and, 
  • possibility of sugar being exported in Jan-Feb 2025 owing to likely remunerative international prices and higher domestic surplu

In its first advance estimate for SS2024-25, ISMA has pegged India's gross sugar production at 33.3mn tonnes andclosing stock at 8.78mn tonnes leaving room for at least 1.5-2mn tonnes of exports, added the report.

Thus in light of the upcoming SS2024-25, the brokerage envisages healthy improvement in millers’ operating performance.

And hence has reiterated its previous buy stance on Balrampur Chinia, Triveni Engineering, Dwarikesh Sugars and Praj Industries (PRJ IN), with Balrampur Chini as its top pick.

Stocks to buy                Target price

Balrampur Chini            Rs 647

Praj Industries               Rs 827

Dwarikesh Sugar          Rs 77

Triveni Engineering       Rs 482