A Safari through India’s Sugar Sector

Hey there, welcome to the first blog in this new series of newsletters by Green Portfolio. This is Exploring Stocks and Sectors – A Safari. I am Isha, and starting today, my colleague Anchal and I are going to discuss a trending sector and a company thereof. We’ll understand the industry and analyze what’s been going on in the markets. To start off, we have picked something sweet. Read on to know what it is!

A little birdie told someone that the government might soon put restrictions on the sugar industry, which led to a little bit of havoc for the sugar stocks. This got me interested to know more about the industry, and so today, we are discussing something sweet. 

Understanding the sector

India is the largest consumer and the second largest consumer of sugar in the world. After textiles, sugarcane is the most important crop to agriculture in India which is why it is also significant for the economy. Here’s how:

• Sugarcane is grown round the year. It is cultivated in both tropical and subtropical regions for four seasons.
• Sugar industry is huge economically, its worth is over 80,000 crores rupees.
• It employs over fifty million farmer families directly, thus it is vulnerable to political scrutiny. 

You must have been seeing the world go around trying to find greener sources of energy right? Anyone who has heard of this would know about ethanol. Traditionally, ethanol was just an ordinary industrial chemical but now, it has started to be used as a fuel. From sugar to oil, are we trying to bake cookies here? No, the relation between the two products here is that ethanol is a byproduct of sugar. A while ago, the government of India decided that all the petrol being consumed in the country will have at least twenty percent ethanol mixed in it. This came as great news to the sugar industry because now, sugarcane is more in demand and the industry is starting to get more business. 

Since everything about sugarcane is indeed sweet, why are there rumors about an export ban? This year, we have been seeing food inflation going up. Prices of everyday vegetables like tomatoes and staple grains like wheat and rice went up forcing the government to take actions. Most of this is happening because of the climate. The monsoon this year was untimely and scattered, and agriculture suffered because we are still dependent on rains. 

Now since 2024 is an election year, the government will make additional efforts to keep everyone happy. So when the supply of rice and wheat decreased, the government quickly resorted to export restrictions. This kept inflation in check by fulfilling domestic demand. This year, sugarcane production too is lesser, but we continue to be the largest sugar consumers and ethanol is still in demand. Thus, there can be a shortage of sugarcane domestically if we continue to export it. 

Earlier this week the markets factored the rumors in and we saw sugar stocks going through price shifts. Let’s talk about a company in particular to understand the industry better.

Stock Specifics: Dalmia Bharat Sugar

We are talking about Dalmia Bharat Sugar. A part of the Dalmia Bharat Group, this company is a part of our portfolio. Dalmia sugar was established in the 1990s so it is not very old when we look at the industry but even in a couple of decades, it has grown significantly fast to now be one of the largest in the business. 

Dalmia primarily produces sugar but as byproducts, it also produces ethanol and green power. One advantage that Dalmia has over other sugar companies is its plants in UP and Karnataka. These two states are some of the largest sugar producers in the country but there are no large sugar mills established here. 

I talked about ethanol earlier and Dalmia is one of the companies going big on this. It already has distilleries for ethanol production and is planning to double down on it. They are increasing the capacity of distilleries, doubling it by December 2023 to focus more of this.

If we look at the financials, the company reported good numbers for the last quarter. There has been a 92% QoQ growth in revenues and a 91% increase in the PAT. We’ve seen it to be fairly resilient even at times when sugar production was lesser, like last year.

On the topic of sugar export ban, even if it happens, the impact might not be too harsh for two reasons:

• Stability in domestic prices due to demand-supply economics
• More capacity to produce ethanol

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