India Sugar Sector Check - Export To Be Delayed, Ban Unlike; Ethanol Price Hike Positive: Systematix

Systematix Research Report

Recent news articles indicate that Government of India may ban sugar exports in the ensuing October 2023 to September 2024 sugar season. Erratic rainfall in key sugarcane-growing areas and extra diversion to ethanol are key reasons it has cited for lower sugar production.

We believe the government may ban exports to ensure sufficient sugar availability in the domestic market and to keep sugar prices under check in the election year (2024). ISMA (expand) forecasts India to produce 31.7 million tonnes of sugar and consume 27.5 million tonnes in SS23-24, leaving the country with surplus of ~4 million tonnes.

The opening inventory for SS23-24 is pegged at 6.2 million tonnes, which translates into 2.7 months of consumption, enough to meet any exigencies.

Thus, we believe, the government may consider evacuating the surplus in international markets, to retain sugar prices above Rs 36/kg level. However, in our view, GoI could also delay its decision to allow exports this year, likely announcing the same only by January-February 2024, as production volumes would become clearer by then.

Many Uttar Pradesh-based sugar companies expect 5-10% higher cane availability in SS23-24, given the shift in cane variety and higher acreages. This could improve the cane availability YoY in UP and enable higher crushing.

Oil marketing companies have further raised the ethanol price by Rs 3.71/litre, made using damaged grains. This hike should offset the higher cost of damaged grains, with the remunerative ethanol prices boosting sugar companies’ earnings.

Higher ethanol contribution and firm sugar prices would cumulatively drive the profitability of sugar companies. We thus retain our positive stance on the sector.

Balrampur Chini Mills Ltd. is our top Pick within our sugar universe, as has recently doubled its distillery capacity to 350 million liters per annum and clock 43%/47% Ebit/profit after tax compound annual growth rate over FY23-25E, generate free cash of Rs 8.8 billion over FY23-25E, and likely continue to reward shareholders through buybacks.

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