1. I bet the precise reasoning for the reduction and rather a intendedphased reduction in export subsidies is due to the fact that government has been pushing for ethanol blending programme since last 3-4 years heavily but owing to constant heavy production and capacity constraints for production of enough ethanol (particularly from B-Heavy molasses and direct sugarjuice), the govt has not been able to move in their goal much till last year. But since last year, owing to subsidised loans for capacity building for ethanol plants) they have incentivised the sugar manufacturers to become integrated plants rather than operate as a standalone sugar mills as this results in higher realisation per sugarcane crushed (1st RM for all the output - sugar, ethanol, molasses).
2. Further, the prices of sugar have been controlled in domestic market since ages and thus despite surplus production mills never could raise price much beyond the regulated price due to constant demand glut, (I think that's currently Rs. 3100/qtl since 2018). Further, the demand india has predominant demand for white sugar whereas the global demand is predominant for raw brown sugar and further since brown sugar gives better yield in terms of sugar realisation, mills have been able to divert more of late for brown sugar for exports)
3. Further, due to revision in ethanol blending targets and capacity buildup with mills, they have now been trying to shift to sourcing revenue from ethanol sales rather than sugar sales (sugar segment has margin of around 4-5% - considering both domestic and export; whereas spirits segment has margin of 25-30%) plus the reduction in power rates by state discoms have cumulatively making mills to focus more now on alcohol production as it is more lucrative - all major producers be it Dhampur, balaram, EID Parry, Avadh, Magadh, etc have doubled their capacities of ethanol production because the margins of sugar companies will be now more from ethanol and not from sugar.
4. The sugar output may be in mills hands but the qty they can sell in domestic market is controlled by govt through monthly sugar sales quota (infact it's released on monthly basis and even the calculation is based on past output and realisations- hence they margin constraint of mills is not the price but the qty they can statutorily sell in domestic market whereas there is no such restriction wet ethanol and exports - ethanol contracts are done on annual basis and it's industry trend that annually around 15% of the contracted qty is left over or unfulfilled so there is headroom for qty increase leading to better profits predominantly through ethanol in future)
Summarising -
1. Ethanol blending picking up pace since last year due to capacity buildup
2. Export prices ( though I doubt this will be much exploited by mills considering the associated export costs compared to more lucrative ethanol margins)
3. Chances of rise in FRP in UP in coming year.
4. Sales qty quota restrictions wet sugar but no such restriction in ethanol.
So, even though mills were dependent on subsidies for their margins and working capital on soft loans from government, but with ethanol blending they are shifting focus more to spirits mfg and sale.
So, I personally think even though stock prices may see short term shocks due to effects of lack of subsidy, but over next year, the ethanol dependence will be clearly evident, and hence may not be much affected by subsidy issues.
That's a good article ...
I just want to add few pointers.
1. I bet the precise reasoning for the reduction and rather a intendedphased reduction in export subsidies is due to the fact that government has been pushing for ethanol blending programme since last 3-4 years heavily but owing to constant heavy production and capacity constraints for production of enough ethanol (particularly from B-Heavy molasses and direct sugarjuice), the govt has not been able to move in their goal much till last year. But since last year, owing to subsidised loans for capacity building for ethanol plants) they have incentivised the sugar manufacturers to become integrated plants rather than operate as a standalone sugar mills as this results in higher realisation per sugarcane crushed (1st RM for all the output - sugar, ethanol, molasses).
2. Further, the prices of sugar have been controlled in domestic market since ages and thus despite surplus production mills never could raise price much beyond the regulated price due to constant demand glut, (I think that's currently Rs. 3100/qtl since 2018). Further, the demand india has predominant demand for white sugar whereas the global demand is predominant for raw brown sugar and further since brown sugar gives better yield in terms of sugar realisation, mills have been able to divert more of late for brown sugar for exports)
3. Further, due to revision in ethanol blending targets and capacity buildup with mills, they have now been trying to shift to sourcing revenue from ethanol sales rather than sugar sales (sugar segment has margin of around 4-5% - considering both domestic and export; whereas spirits segment has margin of 25-30%) plus the reduction in power rates by state discoms have cumulatively making mills to focus more now on alcohol production as it is more lucrative - all major producers be it Dhampur, balaram, EID Parry, Avadh, Magadh, etc have doubled their capacities of ethanol production because the margins of sugar companies will be now more from ethanol and not from sugar.
4. The sugar output may be in mills hands but the qty they can sell in domestic market is controlled by govt through monthly sugar sales quota (infact it's released on monthly basis and even the calculation is based on past output and realisations- hence they margin constraint of mills is not the price but the qty they can statutorily sell in domestic market whereas there is no such restriction wet ethanol and exports - ethanol contracts are done on annual basis and it's industry trend that annually around 15% of the contracted qty is left over or unfulfilled so there is headroom for qty increase leading to better profits predominantly through ethanol in future)
Summarising -
1. Ethanol blending picking up pace since last year due to capacity buildup
2. Export prices ( though I doubt this will be much exploited by mills considering the associated export costs compared to more lucrative ethanol margins)
3. Chances of rise in FRP in UP in coming year.
4. Sales qty quota restrictions wet sugar but no such restriction in ethanol.
So, even though mills were dependent on subsidies for their margins and working capital on soft loans from government, but with ethanol blending they are shifting focus more to spirits mfg and sale.
So, I personally think even though stock prices may see short term shocks due to effects of lack of subsidy, but over next year, the ethanol dependence will be clearly evident, and hence may not be much affected by subsidy issues.
Very insightful
Thanks team ReadOn