Are India's Top Ethanol Stocks Set for Sky High Returns? The Answer Will Surprise You...

Last month, we wrote to you about Top 4 Ethanol Stocks to Add to Your Watchlist.

In the article, we discussed the use of ethanol as a fuel for internal combustion engines, either alone or in combination with other fuels, due to its potential environmental and long-term economic benefits over fossil fuels.

In this article, we will cover the new initiatives taken by the government and key Indian firms to address rising ethanol demand.

In a very recent development, Finance Minister Nirmala Sitharaman in her budget speech, proposed to levy additional excise duty of Rs 2 per liter on unblended fuel. The tax will be applicable from 1 October 2022.

This action is intended to increase ethanol mixing of fuel or flex-fuel, which would directly benefit sugar firms. Ethanol blended petrol is claimed as less pollutant compared to petrol because of its biofuel nature.

With an ethanol policy in place, India's reliance on fossil fuels will be significantly reduced.

Currently, India imports 80% of its fossil fuel requirements. This results in a massive expense for the country. The fuel import expense would be drastically reduced if petrol was combined with ethanol.

The Indian government in July last year set a target of 20% ethanol blending with petrol by 2025. Since the unveiling of India's ambitious plans to generate flex-fuel, ethanol stocks have been in the limelight.

Let's take a look at what India's top ethanol producers have been up to in the meantime.

1. Praj Industries

In a very recent development, agro-tech firm Swaraj Green in partnership with Praj industries has announced it would commission Asia's largest ethanol manufacturing plant at Phaltan, Maharashtra.

It will be commissioned in two stages, using technology patented by city-based energy firm Praj Industries that extends the shelf-life of sugarcane juice, a key input in ethanol.

The first phase of the plant, which will be commissioned by the end of the year, will have an ethanol production capacity of 500 kilo liters per day (KLPD). The second phase of the project is scheduled to enhance the capacity to 1,100 KLPD.

Both the parties previously collaborated to set up another ethanol plant in 2018, which has a capacity of 60 KLPD.

Praj's technology, Biosyrup, was launched commercially by the company last month. It converts sucrose into glucose and fructose. It uses patented bio enzymes to drain out excess water from the resultant water. This extends the life of the sugarcane juice to up to 12 months.

It partnered with a sugar processing unit in Karad to deploy the pilot project, which also resulted in a definitive order.

While launching the technology, the company claimed the increased production of ethanol will help the sugar industry increase revenue.

Two months back, Praj Industries also inked a memorandum of understanding (MoU) with Indian Oil to explore opportunities in production of alcohol to Jet (ATJ) fuels, 1G & 2G Ethanol, compressed biogas (CBG), and related opportunities in the biofuels industry.

For the December 2022 quarter, the net profit of Praj Industries rose 31.6% year on year (YoY) to Rs 370.5 m against Rs 281.6 m during the previous quarter a year ago.

Order intake during the quarter stood at Rs 9.6 bn for the third quarter, while the consolidated order backlog for the first nine months ending 31 December 2021 stood at Rs 26.1 bn. This comprised 80% domestic orders and 20% international orders.

2. Shree Renuka Sugars

Shree Renuka Sugars, which is a subsidiary of Singapore-based Wilmar Sugar Holdings, is one the largest sugar and ethanol producers.

Last year, the country's largest sugar producer became profitable aided by several government incentives linked to ethanol blending and exports.

During the month of June 2021, the company announced it will invest Rs 4.5 bn to expand its ethanol capacity from 970 KLPD to 1,400 KLPD to meet untapped demand.

Since then, the company is focused on increasing its production capacity and reducing debt levels.

Throughout last few quarters, Shree Renuka has reduced current liabilities to 71% of total assets, thereby reducing the amount of borrowing from suppliers or short-term creditors.

For the third quarter of the financial year 2022, the company saw a sharp turnaround in profit before tax (PBT) which stands at Rs 436 m against a loss of Rs 59 m on a year on year (YoY) basis.

It also witnessed 132% increase in profit after tax (PAT) at Rs 434 m compared to loss of Rs 1,355 m in the previous year.

The company's total income was up by 43% YoY at Rs 19,816 m in December 2022 quarter driven by a massive 67% increase in ethanol sales and catch-up in refinery shipments with better realisations.

The stock was one of the most popular multibagger penny stocks in 2021. It could be a multibagger penny stock in 2022 as well if the strong momentum continues in the sugar space.

In last one year, it has surged from Rs 9 to Rs 35 apiece levels, appreciating 289% in this period.

3. Dwarikesh Sugar

Dwarikesh Sugar is the second-largest and one of the most efficient sugar companies in India.

Along with sugarcane juice, B-heavy, it's also utilising grain-based ethanol to leverage the ethanol opportunity in India.

The UP based sugar company has the sugar crushing capacity of 21,500 tons of cane per day (TCD), distillery capacity of 163 KLD and co-generation capacity of 91 MW.

It's undertaking a distillery capacity addition of 170 KLD with investment of Rs 2.3 bn. The distillery will be commissioned by June 2022. The company would be able to increase distillery volumes to 110 m litre in the fiscal 2024 from the current 32 m litre.

The company reported over 286% rise in standalone profit at Rs 288 m for the quarter ended December 2021.

Profit in the year-ago period stood at Rs 74 m. Revenue from operations rose to Rs 6 bn in the same quarter from Rs 3.8 bn in the year-ago period.

In the past one year, the share price jumped from Rs 27 to Rs 85, logging a 215% gain. Rs 1 lakh invested in this multibagger stock a year ago would have turned into Rs 3.1 lakh today.

4. Balrampur Chini

The last stock to the list is Balrampur Chini.

Balrampur Chini Mills is an integrated sugar manufacturing company. The company is engaged in the manufacturing of sugar, ethanol, and power.

Recently, the board of the sugar producer approved the sale of entire 45% stake in its associate company - Visual Percept Solar Projects Private Limited.

Torrent Power announced a Rs 1.6 bn acquisition of 25 MW solar power plants operated by a special purpose vehicle (SPV) of Blue Diamond Properties and Balrampur Chini Mills.

The firm plans to crush 5-7% more cane during the current sugar season. Sugar recovery is lower due to climatic reasons.

The company completed the expansion of its Gularia distillery from 160 KLPD to 200 KLPD. Also, the greenfield/brownfield expansion programs for distilleries at Maizapur and Balrampur are on track. They are expected to commence production at the expanded capacity from November 2022.

In December 2021, the company said it will invest Rs 4 bn during the current fiscal to enhance its distillery capacity from 520 KLPD to 840 KLPD. This will be done by adding another 320 KLPD at its Maizapur plant in Uttar Pradesh.

The company delivered robust results during the December quarter aided by increased realisations in the sugar and distillery segments.

Meanwhile, Balrampur Chini has announced large capex of around Rs 9.9 bn over the fiscal year 2022-2023 towards distillery capacity expansion, modernisation of plants/debottlenecking and setting up of refineries.

For funding the said capex, Rs 5 bn debt (partially under interest subvention) is planned to be availed.

Shares of Balrampur Chini has been in uptrend for last one year. It has delivered 119% return in the last 12 months whereas in the last 3 months it has given only 21% to its shareholders.

Should you bet on ethanol stocks?

Ethanol has been a game changer for the sugar industry.

As diversification into distillery, ethanol, and electricity became possible, most sugar businesses in India are turning into integrated players. This has increased molasses demand.

The Indian government has made ethanol blends in motor vehicle fuels mandatory. This directive has provided sugar mills the opportunity to implement forward integration.

Besides, flex-fuel is also a good solution to address the problem of excess sugar production.

To meet the target of 20% ethanol blending in petrol by 2025, the government has already directed oil CPSEs (Central Public Sector Enterprises) to set up second generation ethanol bio-refineries.

It has also lowered the goods and service tax (GST) on ethanol meant for blending with gasoline from 18% to 5% to curb dependence on imports.

While these reasons are compelling, one must view ethanol stocks with the same amount of caution as one would view other stocks. Ethanol stocks are vulnerable to the cyclical nature of the sugar industry and agro-climatic risks related to cane production.

Further, their profitability remains vulnerable to the policies of the government, domestic and international trade, and pricing.

If you plan to invest, assess the fundamentals and prospects of the business. Sustained research must not be compromised despite the positive odds.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...