Ethanol sales surge as government eases sugar diversion rules
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. 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. 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. 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. The ethanol blending rate in India is expected to reach 14 % in ESY24, up from 12.1 % in ESY23 and 10 % in ESY22. Although this falls short of the government?s 15 % 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 % 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 % ethanol blending by 2026 remains ambitious, Ind-Ra believes that even a 16 % -18 % blending rate will ensure continued growth. 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 decision on exports is expected only in Q4FY25. With a likely hike in ethanol prices and increased blending rates, the sector is poised for a rebound in the second half of FY25, though challenges related to high inventory and rising cane costs persist.
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