Should one buy sugar stocks on dips? Prashant Biyani answers
Prashant Biyani, V-P, Institutional Equity Research,Elara Securities, says “I would not say one should be aggressively buying it. But yes, we do not expect any further fall from here because especially on the larger ones, the impact could be limited to the extent of maybe 15% on EBITDA and PAT over the next 12 to 18 months. But due to other events like sugarcane SAP being due for revision, some amount of sentiment being negative around ethanol, I would not suggest buying sugar companies as of now.”
Sugar companies cannot use sugarcane juice or syrup for ethanol with immediate effect which means mills will have to resort to B-heavy or C-heavy molasses or ethanol production. What about the contracts already signed for supply using sugar juice?
The contracts which have been signed will now be lapsed with immediate effect for juice-based ethanol with the caveat that whatever is the existing stock like, lying with the sugar companies that might be taken up by the OMCs.
But production needs to stop immediately for juice-ethanol. For B-heavy ethanol till the time we have the existing contracts, till then supplies of B-heavy ethanol will continue.
And post that, for subsequent tenders, it will only be C-heavy ethanol which OMCs will take.
What is the margin differential then between ethanol made from sugarcane, B-heavy and C-heavy molasses?
Even though volumes are higher for juice-ethanol, margins are lower by around 50% vis-à-vis B and C molasses-based ethanol and that is because there is no sugar production when you are making juice-ethanol. So the entire cane cost gets built on to the ethanol only.
