Sugar companies have been buzzing on Dalal Street due to the extraordinary returns they have given to investors in the past three years. Players like Rana Sugars, Shree Renuka Sugars, Triveni Engineering & Industries, India Sucrose and Dwarikesh Sugar have soared between 300 per cent and 1,000 per cent during the same period. Industry watchers believe that the government’s focus on the sugar sector augurs well for the sector. In an interaction with Business Today, Vijay S Banka, managing director, Dwarikesh Sugar Industries, explained how the industry has changed and what the government’s focus on ethanol blending means for the sector. Edited excerpts:
Business Today (BT): How has the sugar industry changed from being cyclical to structural?
Vijay S Banka: Indian sugar industry used to be a cyclical industry. They used to have two years of surplus, two years of deficit, and one normal year. Because of the successive increase in cane prices and the introduction of new and better varieties, farmers have been able to increase the yield. So, India is now a structurally surplus sugar producer. This is the big change that has happened. So, to address the surplus, the government has:
A) The overhang of stock: They are trying to address this problem by encouraging exports. India has done phenomenally well in the export market in the last few years.
B) The ethanol blending program: This is how the big changes happened. So, India and the sugar industry are no longer cyclic.
BT: How can the government’s focus on ethanol transform the sugar industry? Do you think it is transforming into the energy sector?
Banka: Absolutely, the government has very rightly identified the problem of the sugar industry because it’s a surplus sugar-producing nation. So, they found an alternative use for the sugar cane, which is where this ethanol building program comes in. The ethanol blending program will result in a sacrifice of production in favour of ethanol. The government has set some lofty targets. For example, they intend to do about 20 per cent blending by 2025. With that kind of program, the sacrifice of sugar will happen in favour of ethanol. Companies are now investing big time in building up ethanol capacities. And worldwide, the trend is to convert food into energy. So, this is what the Indian sugar industry is doing. So that’s how we can rightly say that the sugar industry is on the cusp of being categorised as the energy sector.
BT: How do you see sales and profit growth over the next 5-10 years?
Banka: This ethanol blending program is a long-term program and it is here to stay because the government is also planning to introduce Flexi fuel vehicles. So, the ethanol blending program is a long-term program that will address the woes of the sugar industry. It will help the cash flows of the sugar industry and also the profitability of the sugar industry and it will help the industry to pay the farmers remunerative prices on time. The sales mix of the sugar industry is going to undergo a big change. In fact, it is already changing.
What will happen is sugar, which used to constitute more than 90 per cent of the total value of the sales of any sugar company, will come down significantly. So, in due course of time, we will see maybe 30 per cent of the revenue of the sugar companies coming from ethanol – that’s the distillery segment and maybe about 18 per cent coming from the power sector. The dependence on sugar will be less and with sugar sacrificing happening, the overall sugar balance in the country will be reasonable.
There will not be any overhang of excess stock which will result in better sugar prices. On the one hand, reasonable and remunerative prices for ethanol and on the other hand, with the expected moderation in sugar inventory, sugar prices also will become reasonable. This will help the profitability of sugar companies in the times to come.
BT: How lucrative is the ethanol business for a sugar company like yours?
Banka: It is of course is lucrative proposition because like I said, our entire sales mix is going to become more remunerative. From excessive dependence on sugar, we will now be moving away. For encouraging the ethanol blending program, the government has set some reasonable ethanol prices. So, with improvement in sugar prices also, we expect our company should do well in time soon. It augurs well for the sugar industry and, of course, for us as well.
BT: What are your plans related to ethanol? How much capital expenditure Dwarikesh Sugar has done on the same?
Banka: We already have ethanol-producing capabilities of 162.5 kilolitres per day (KLPD). We are picking up another plant of 175 KLPD. Therefore, the total capital outlay is 232 crore, for this. Our project is in the advanced stages of execution and this plant should be up and running by the end of June 2022. With the setting up of this plant, our ethanol capacity will go up to more than 330 KLPD per day, and, the model that we have thought of is to run both the distilleries on juice during the season and run them on the B heavy molasses during the off-season.
BT: How will be the revenue composition from the sugar and ethanol business going ahead?
Banka: In our case, nearly 30 per cent of revenue will come from the distillery segment, which is by selling ethanol and power will be about 7-10 per cent of the total revenue. So, obviously, the sugar segment will come down to anything between 60-65 per cent in times to come, which is a very remunerative sales mix and which will cut down our huge dependence on the sugar segment. This augurs well for our company.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today