Dhampur Sugar (which is in six stock screeners)and other sugar mill companies have gained in share price quite sharply over the past week driven by recent government moves. Today, media reports suggested that the government is considering providing 45 billion rupees ($617 million) in subsidy assistance to sugar mills, in order to boost exports and cut domestic surplus next year.
The subsidy could amount to Rs. 13.88 per 100 kilograms of cane to sugar mills in the year starting Oct. 1, compared with Rs 5.5 in the previous season.
This follows the move by the government to incentivize ethanol production as oil prices rise. Sugar companies have seen share prices jump on the news of the government increasing the procurement price of ethanol produced from B-heavy molasses (also called intermediary molasses) to Rs 59 per litre from the current Rs 47.1 per litre, and that produced from C-heavy molasses to Rs 53 per litre from the existing Rs 43.46 per litre
The government is pushing for 10% ethanol blending into oil, to manage rising crude oil prices, sanctions against Iran hurting oil imports, and a falling rupee. The ethanol industry is likely to supply ~2.2 billon litre of ethanol to oil marketing companies. But current capacity for extraction of B-heavy molasses are only sufficient to supply 400 million litre of ethanol.
1 billion litre of newer ethanol capacity is expected to be added in the coming year, which would further increase ethanol volumes of sugar companies, and Dhampur Sugar is among the firms looking to aggressively increase ethanol production.
One of the reasons the government is also considering the subsidy assistance to sugar companies is the supply glut in the market. Analysts estimate approximately 20 million excess tonnes of sugar in the system by October 2019. If significant quantities are not exported in the next year, sugar prices can fall below Rs 30, which would significantly strain the balance sheet for sugar companies, regardless of price hike for ethanol procurement.