Ethanol sales surge expected as government eases sugar diversion rules

• Published 3 months ago
• By SuperAdmin

This decision is expected to enhance ethanol sales and divert sugar towards ethanol production, providing relief to sugar companies grappling with increased inventory levels in FY24.

New Delhi: In a significant move aimed at boosting the sugar industry's financial health, the government has lifted restrictions on the use of sugarcane juice, sugar syrup, and B-molasses for ethanol production in the ethanol supply year (ESY) 2024-25. This decision is expected to enhance ethanol sales and divert sugar towards ethanol production, providing relief to sugar companies grappling with increased inventory levels in FY24.

India Ratings and Research (Ind-Ra) highlighted that the government's move would support the cash flows of sugar companies, which saw a 30 Percent year-on-year (YoY) drop in cane-based ethanol sales, amounting to 1,757 million litres in the first seven months of ESY24.

The restrictions imposed in December 2023 had negatively impacted the revenue and EBITDA of sugar firms during the latter half of FY24 and early FY25. With the restrictions lifted, the sugar diversion towards ethanol is expected to reach 4 million tonnes (mnt) in SS25, a notable increase from around 2 mnt in SS24.

Sugar inventory levels to remain elevated despite the move

While the lifting of restrictions will aid ethanol sales and reduce sugar inventory, Ind-Ra notes that stock levels will still remain above the normative requirement. Sugar inventory is projected to decline only marginally, from an estimated 8.5-8.8 mnt at the end of SS24 to around 8.4 mnt by the end of SS25, compared to the normative level of 5.5-6 mnt. This creates room for potential exports of around 2 mnt, which have been restricted since June 2022. However, any decision on exports is expected only in Q4FY25, once clarity on production levels for SS25 is available.

The initial restriction on ethanol diversion, implemented to ensure adequate domestic sugar availability and prevent price hikes, had led to a 10 Percent -11 Percent YoY increase in sugar prices in 3QFY24. However, higher-than-expected sugar production in states like Maharashtra and Karnataka resulted in excess inventory. The easing of restrictions is expected to mitigate the impact of surplus production and prevent further inventory build-up.

Impact on ethanol sales and sugar prices

With the diversion of around 4 mnt of sugar to ethanol, net production is likely to align more closely with domestic demand. Sugar consumption is expected to rise to 29-29.5 mnt in SS25, up from 28.5 mnt in SS24. The expected improvement in ethanol sales, along with a stable domestic sugar market, will aid the cash flows of sugar companies, which have faced working capital challenges due to high inventory levels in FY24.

Sugar prices saw a 5 Percent YoY increase in the first five months of FY25, following a 7 Percent -8 Percent increase in FY24. The diversion of sugar to ethanol is expected to support prices, providing a cushion against rising cane procurement costs. The central government has already raised the fair and remunerative price (FRP) of sugarcane by 8 Percent YoY to INR340/quintal for SS25. A further hike in the state advised price (SAP) of cane in Uttar Pradesh, one of the key sugar-producing states, is expected to increase production costs by INR1.5/kg. However, this impact will be spread across FY25 and FY26.

Cash flow and leverage levels

The sharp inventory build-up in FY24 had led to negative cash flow from operations (CFO) for many sugar companies. Ind-Ra expects a significant improvement in CFO in FY25 as working capital requirements ease with the reduction in inventory levels. While debt levels rose in FY24 due to the working capital lock-up, a gradual correction in leverage is expected over FY25-FY26. However, the low debt levels seen in FY23 are unlikely to return in the near term due to elevated inventory levels.

Ethanol price hike anticipated in ESY25

To further incentivise ethanol production, Ind-Ra anticipates a 3 Percent -5 Percent increase in ethanol prices in ESY25. This will help offset the rising cost of production due to increased sugarcane procurement costs. The government has also allowed ethanol producers to participate in the Food Corporation of India’s e-auction for rice, which could improve feedstock availability for ethanol production. However, auction prices under the Open Market Supply Scheme (OMSS) are elevated at INR28/kg, compared to the previous policy of a fixed price of INR20/kg.

Ethanol blending to rise

The ethanol blending rate in India is expected to reach 14 Percent in ESY24, up from 12.1 Percent in ESY23 and 10 Percent in ESY22. Although this falls short of the government’s 15 Percent target, the increase in blending is attributed to a surge in grain-based ethanol production, particularly from maize. The share of cane-based ethanol had dropped to 49 Percent in ESY24 due to the restrictions, but the lifting of these curbs is likely to boost the share of cane-based ethanol in ESY25. While the government’s goal of achieving 20 Percent ethanol blending by 2026 remains ambitious, Ind-Ra believes that even a 16 Percent -18 Percent blending rate will ensure continued growth.

Conclusion

The government’s decision to lift restrictions on the diversion of sugar towards ethanol is expected to provide much-needed relief to sugar companies by boosting ethanol sales and reducing inventory levels. However, sugar stocks will still remain above normative levels, and a de…