Sugar stocks: Sharekhan says lower ethanol production may hit FY25 earnings, retains 'Buy' on these 4 shares

Sharekhan said the government's ban on ethanol production from sugar syrup/juice for SY 2023-24 is unlikely to hit FY24 earnings, but FY25 earnings estimates may slip 5-18 per cent for companies that it covers, depending on production of ethanol through syrup/sugar juices. The domestic brokerage said the move is seen as a temporary measure to curb sugar price spikes.

If domestic sugar inventories improve from current expectations, Sharekhan said the decision might be reversed. The domestic brokerage said the move was aimed at curbing inflation in domestic sugar prices in coming months and that the sector’s long-term prospects remained intact, with the government maintaining its target of achieving a 20 per cent blending by Calendar 2025, supporting investments in distilleries.

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Sharekhan maintained its ‘Buy’ ratings on Balrampur Chini Mills Ltd, Dhampur Sugar Mills Ltd, Triveni Engineering  Industries Ltd and Dhampur Bio Organics Ltd for now.

According to industry estimates, sugar production for SY2023-24 (net of diversion) is expected at 30.0-30.5 million tonnes while domestic consumption is expected at 28-29 million tonnes. Excluding diversion to ethanol, sugar production is expected to be 31.5-32 million tonnes, Sharekhan said.

"The industry is of the opinion once sugar inventory builds in the coming  month, the government might reverse the decision after six months. However non-reversal of  decision might affect earnings of sugar companies in FY2025, which might recover in FY2026. This is a temporary blip, while long-term growth prospects for sugar sector is intact," Sharekhan said.

Sharekhan said there are a few factors which can  have positive/negative impact on the earnings estimates of sugar companies in coming  quarters. They included a hike or no increase in ethanol prices from B-Heavy/C-heavy molasses for SY2023-24, a hike in state  advisory price (SAP) of sugarcane in Uttar Pradesh and momentum in sugar prices (currently  trading at Rs 40-41 per kg ex-mill) in the coming months depending on demand-supply gap.

(Disclaimer: Business Today provides stock market news for informational purposes only and that should not be construed as investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.)

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