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This article is more than 3 year old.

Increase in ethanol price is positive for sugar companies but may impact liquor firms

Increase in ethanol price is positive for sugar companies but may impact liquor firms
In order to encourage sugar mills to divert production of sugar to the vehicle fuel, the cabinet on Wednesday gave its nod to increase ethanol prices by 25 percent.
The ethanol price hike will help sugar mills, saddled with massive mounds of the sweetener, divert cane juice for ethanol production. Earlier, the government had fixed the price of ethanol produced from sugar cane juice at Rs 47.5 rupees per litre.
Increase in ethanol production would lead to around 0.7-0.8 million tonnes of less sugar production in the coming 2018-19 season, which starts from December 2018.
The industry expects sugar factories will supply around 200-225 crore litre of ethanol to oil marketing companies (OMC). Of this, around 40-50 crore litre would be produced from B-heavy molasses, while the rest would come from C-heavy molasses.
In June 2018, the government had fixed the price of ethanol produced from B-molasses at Rs 47.49 rupees per litre.
Also on the blending side, the industry expects the production to reach to 10-15 percent from current level of 4-5 percent in the next three years. The sugar companies will have to enhance their infrastructure for ethanol production as well.
It is a positive sign for sugar companies as ethanol is a high margin business for sugar companies. The companies make margins of around 25-50 percent currently on ethanol blending.
The move to increase the price of ethanol by 25 percent is a welcome one, said Atul Chaturvedi, executive chairman of Shree Renuka sugar. "Going to ethanol route makes sense considering the way crude prices are moving," Chaturvedi said.
It is a positive move by the government, especially the move to increase the price of B-Heavy molasses, said Tarun Sawhney vice chairman and managing director of Triveni Engineering and Industries. "The increase in ethanol production will help to reduce sugar surplus," he said.
Indian Sugar Mills Association (ISMA) also expects the ethanol blending production will be around 10-15 percent in the next three years from current level of 4-5 percent.
On the other hand, price hike may impact gross margins of liquor manufacturing companies as ethanol is one of the raw material which is used for production.
Credit Suisse Downgrades United Spirits
Foreign brokerage house Credit Suisse has cut its target price and downgrades its rating on United Sprites. They cut earnings by 9-15 percent and lower target price to Rs 610 and downgrade the company to neutral.
The brokerage said United spirits is likely to see an increase on the average prices of its key raw material - extra neutral alcohol (ENA) - procurement, thus ending a period of input cost deflation.
The glut in sugarcane over the past one year has helped sharply lower prices of molasses based ENA as well as kept prices of grain-based ENA in check. For United Spirits 70 percent of the ENA is grain-based and 30 percent is molasses based.
The impact of increased prices for fuel blending will be directly felt in molasses based ENA, while it will be much lower on grain-based ENA.
The overall average buying price of ENA for United Spirits will see inflation as compared to a slight deflation in the past one year. But spirits industry has no pricing power unlike normal consumer businesses in India, so the impact on margins can be material.
Thus, gross margin expansion will become tough, which is currently part of the estimates. In the worst case if the increase in price does not come through there could be a hit on gross margins as well.
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