While markets slipped on Thursday, sugar stocks bucked the trend with gains of 3-12% following Cabinet Committee on Economic Affairs’ (CCEA) decision on ethanol procurement. On Wednesday, the CCEA decided to fix a price of R48.5-49.5 for ethanol procurement by oil marketing companies (OMCs).
Among the major gainers were Simbhaoli Sugars (12.8%), Balrampur Chini (4.9%), Shree Renuka Sugars (4.1%), Bajaj Hindusthan (4.5%) and Dhampur Sugar Mills (3.7%).
However, analysts point out that CCEA’s decision will only make marginal difference as ethanol and cogeneration together don’t contribute more than 25% to a sugar mill’s topline. “Bulk of the revenues are generated from sugar production, which remains a loss-making proposition.
Unless the Rangarajan pricing formula is not adopted by UP, sugar mills will not see a turnaround in their earnings,” said S Ranganathan, head of research, LKP Securities.
According to Bloomberg data, for Dhampur Mills, revenues from chemical production including ethanol, accounted for 23% of its FY14 revenues of R1,823 crore. For Shree Renuka Sugar, ethanol production amounted to 3% of FY14 revenue of R11,546 crore.
In an official release post-market hours on Wednesday, the CCEA said, “The delivered price of ethanol may be fixed in the range of R48.50 per litre to R49.50 per litre, depending upon the distance of sugar mill from the depot/installation of the OMCs as per the slab …”
As per the slabs outlined by CCEA, price of R48.50/litre is fixed for 0-100 kms. For distance of 101-300 kms, the price is fixed at R49/litre and for the distance more than 300 kms between the mill and the OMC depot, price has been fixed at R49.5/litre.
OMCs presently pay R29/litre for ethanol. Under the new mechanism, OMCs will incorporate “Supply or Pay” clause duly backed up with bank guarantee in their supply agreement with ethanol suppliers.
Additionally, OMCs will sign MOU with state governments for a comprehensive system for uninterrupted inter-depot transfer of ethanol within a State. This may include annual excise permits to OMCs for movement of ethanol and other relevant measures.