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June 28, 2022

Ethanol capex on track; margins to inch up... Sector View: Positive

The sugar sector has come out of the bitter cyclicality it used to witness before 2018.
In the last four years several government decisions have improved the fundamentals
Top Picks in Sugar Space

Sector Update
of the sugar sector. On the one hand, floor price of sugar & monthly quota
mechanism helped sugar millers to sell sugar above the cost of production while on Old New Upside
Company CMP
the other hand sugar exports & sugarcane diversion towards ethanol led to the Target Target (% )
reduction in sugar inventories. Moreover, increasing proportion of B-heavy &
Dalmia Bharat Sugar 316 490 490 55
sugarcane juice ethanol would result in significant improvement in margins for sugar
Dwarikesh Sugar 102 145 145 42
millers. Despite record sugar production of 36 million tonne (MT) in 2021-22 sugar
season, sugar inventories are going to be at a four-year low of 6.4 MT by the end of
September 2022 mainly on account of record exports of 10 MT during the season. Sugar stocks have outperformed the market
This has kept sugar prices firm at ~| 35/kg. Moreover, increasing distillery capacities in last two years
would result in more diversion towards ethanol, which, in turn, would improve
 Sugar sector has seen a fundamental
margins of sugar millers and also help in keeping sugar prices firm above the cost of
change with the implementation of
production. It would also help in achieving 20% ethanol blending with petrol by 2025.
biofuel policy to bring ethanol
Sugar inventories at four year’s low of 6.4 MT blending level to 20%

With the record 10 million tonnes (MT) of sugar exports in 2021-22 sugar season,  The government supported the
sugar inventories on October 1 would be 6.4 million tonnes (MT). The government industry with floor price for sugar,
is ensuring the country meets minimal sugar inventory of ~6 MT on October 1 by monthly quota mechanism, buffer &
regulating exports given India requires that much sugar for consumption before the
export subsidy in past
new season sugar arrives by December 1 (sugar crushing starts in November).

ICICI Securities – Retail Equity Research

Considering this maths in mind, the government would allow export of 6-7 MT in  This led to reduction in sugar
2022-23 sugar season. We expect global raw sugar prices to remain firm above 18 inventories in last four year &
cents/lb. Moreover, white sugar prices have also been much more remunerative for currently industry wide sugar
Indian millers, which makes it easier for Indian millers to export sufficient quantities.
inventories are at four-year low of 6.4
Given the inventory levels of 6.4 MT as on October 1, domestic sugar prices to
MT (expected in September 2022)
remain firm between | 34 /kg and | 38 /kg. These prices result in sugar margin of | 1
to | 3 /kg (3% - 6%). Sugar companies with distillery expansion are likely to see  Ethanol blending reached 10% levels
strong earnings growth backed by increasing ethanol volumes & debt reduction. & with the further expected capacity
Ethanol capex on track; lifetime margins in next two years addition in next two years, it would
reach 20% by 2025
Given aggressive capacity expansion for distilleries in last three years, ethanol
blending levels have reached 10% in 2022. We believe current capex announced by  Given the crude prices are hovering
sugar companies & grain based manufacturers would take ethanol supply to 6.5-7.0 above US$100/barrel, Brazil is
billion (bn) litre in the next two years, which would be sufficient for 15-16% blending diverting more & more sugarcane
levels. We believe sugar companies are further required to divert more sugarcane towards ethanol, keeping global
towards ethanol to reach the level of 20% ethanol blending by 2025. With gross sugar sugar prices firm
production reaching at 39 MT, there is sufficient availability of sugarcane for ethanol  Considering, high sugar production
production. However, sugar companies still need to take further distillery capacity in India, the country is still
expansion for achievement of 20% or more ethanol blending. Sugar companies in dependent on exports to the tune of
our coverage universe are aggressively expanding their distillery capacity. Most 6-7 MT (in 2022-23 sugar season)
companies in our coverage universe would be diverting ~10% of its sugarcane
towards sugarcane juice ethanol & rest towards B-heavy ethanol (except mandatory 
levy requirement towards ENA). This would lead to considerable margin Key risks to our call
improvement in next two years. Moreover, sugar inventory levels would come down  Significant dip in global sugar prices
significantly resulting in lower working capital debt and, in turn, reduction in interest could make it difficult for Indian
costs. We remain positive on sugar sector & sugar companies under our coverage sugar millers to export sugar in 2022-
universe. After recent correction, sugar stocks are trading at 4-10x FY24 earnings. 23 season
Within our coverage universe, we like Dalmia Bharat Sugar given it is most
aggressive in ethanol capacity expansion & it has sizable refined sugar capacity for  Any derailment in ethanol blending
exports. We also like Dwarikesh Sugar given it has abundant availability of sugarcane program could jeopardise Industry
in its catchment area & highest sugar recovery among UP sugar millers. Dalmia fundamentals
Bharat Sugar & Dwarikesh Sugar remain our Top Pick in the sector.
Research Analysts
Sanjay Manyal
[email protected]
 Sector Update | Sugar ICICI Direct Research

Financial story in charts….

Exhibit 1: Sugar Demand Supply Scenario
In mn to nnes 2012- 13 2013- 14 2014- 15 2015- 16 2016- 17 2017- 18 2018- 19 2019- 20 2020- 21 2021- 22E 2022- 23E
Gross Production 25.1 24.4 28.3 25.1 20.3 32.3 33.2 28.0 33.0 39.4 39.0
Sugar Diversion 0.8 2.1 3.4 4.5
Sugar production 25.1 24.4 28.3 25.1 20.3 32.3 33.2 27.2 30.9 36.0 34.5
Sugar consumption 22.8 24.2 25.6 24.8 24.5 25.5 25.5 25.4 26.3 27.8 28.0
Sugar Inventory 9.2 7.4 9.0 7.7 4.1 10.6 14.5 10.6 8.2 6.4 5.9
Exports 0.0 2.5 1.1 1.6 0.2 0.6 3.8 5.7 7.0 10.0 7.0
Imports 0.4 0.5 0.0 0.0 0.8 0.3 0.0 0.0 0.0 0.0 0.0
Inventory for days Consumption 148 112 129 114 62 152 208 153 114 84 77
Source: Company, ICICI Direct Research

Exhibit 2: Ethanol demand & blending levels

12.0 25.0

10.0 10.0 billion litre demand at 20.0 20.0

20% blending level
8.0 16.0 15.0
6.0 12.0
10.0 10.0
4.0 8.0 10.0
4.0 6.6
5.3 8.0 5.0
2.0 6.0
2.5 1.7 3.2 4.2
1.5
0.0 0.0
2018 2019 2020 2021 2022E 2023E 2024E 2025E

Ethanol blending (bn tonnes) Blending rate %

Source: Bloomberg, Company, ICICI Direct Research* Conversation ratio form cotton to yarn=1.2kg

Brazil higher sugarcane diversion towards ethanol to keep

sugar prices firm…
Given crude prices are hovering above US$100 / barrel, Brazil is diverting more &
more sugarcane towards ethanol. We believe Brazil sugar production would not
cross 32 MT. This would keep global raw & white sugar prices firm, which, in turn,
would help Indian exports in 2022-23 sugar season.

Exhibit 3: Global Raw Sugar prices (US cents / lb)

Global Raw & White sugar prices are

21.0 hovering at five year high, supporting
exports
19.0

17.0

15.0

13.0

11.0

9.0
Sep-20

Sep-21
Mar-20

Mar-21

Mar-22
Jun-20

Jun-21

Jun-22
Dec-19

Dec-20

Dec-21

Source: Ministry of Commerce, Company, ICICI Direct Research

ICICI Securities | Retail Research 2

 Sector Update | Sugar ICICI Direct Research

Top bets in Sugar Coverage Universe Price Chart

Dalmia Bharat Sugar (DALSUG) 600 20000

500 16000
Dalmia Bharat Sugar (DBS) is only sugar company present in UP as well as in 400 12000
Maharashtra. The company has sugar crushing capacity of 38250 TCD (6 lakh tonnes 300
200 8000
pa), distillery capacity of 600 KLD (18 crore litre per annum) and co-generation
100 4000
capacity of 102 MW & wind power of 16.5 MW (total 30 crore units saleable power)
0 0
The company also forayed in FMCG by launching products under refined sugar,

Dec-18

Dec-19

Dec-20

Dec-21
Jun-19

Jun-20

Jun-22
Jun-18

Jun-21
Honey & edible oil categories under ‘Utsav’ Brand.

 DBS is fastest in utilising B-heavy, sugarcane juice & grain route to produce Dalmia Sugar NIFTY

ethanol. Distillery capacity to grow 2x to 24 crore litre by FY24

 The company exports high quality refined sugar & utilise higher global white
sugar prices to its benefit. This improves its overall sugar realisation given Particulars
prevailing strong global refined sugar prices above US$530/tonne (~| Particulars (| crore) Amount
41/kg) Market Capitalization 2,554.0
Total Debt (FY22) 818.5
 The company has diverted 25% of its sugarcane towards ethanol and also
Cash and Investments (FY22) 103.9
aggressively exported high quality sugar. We believe its dependency on
EV 3,268.6
domestic sugar sales has come down significantly
52 week H/L (|) 568 / 282
We expect distillery volumes to grow from 12 crore litre in FY22 to 22 crore litre in Equity capital 16.2
FY24. This would boost earning at 17.1% CAGR during FY22-24E. With the Face value (|) 2.0
completion of entire capex, distillery (ethanol) segment would contribute ~35% to
the revenues, which would result in significant improvement in operating margins.
We continue to maintain our BUY rating on the stock. We value the stock at | 490,
ascribing a multiple of 10x FY24 earnings

Exhibit 4: Financial summary for Dalmia Bharat Sugar

5 Year CAGR
Key Financials FY20 FY21 FY22 FY23E FY24E CAGR (FY22-24E)
(FY17-22E)

Total Operating Income 2110.8 2685.8 3018.3 12.4% 3131.0 3386.4 5.9%
EBITDA 336.6 471.4 447.7 3.4% 577.2 651.9 20.7%
EBITDA Margin % 15.9 17.6 14.8 18.4 19.3
Net Profit 193.2 270.3 297.3 9.8% 347.9 407.8 17.1%
EPS (|) 23.87 33.40 36.74 9.8% 42.99 50.38 17.1%
P/E 13.2 9.4 8.6 7.3 6.3
RoNW % 9.0 12.6 12.6 15.0 15.4
RoCE (%) 11.8 13.3 12.3 15.1 16.8
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3

 Sector Update | Sugar ICICI Direct Research

Price Chart
Dwarikesh Sugar (DWASUG)
200 20000
Dwarikesh Sugar (DSL) is a UP based sugar company with sugar crushing capacity
150 15000
of 21500 TCD, distillery capacity of 337.5 KLD & co-generation capacity of 91 MW. It
100 10000
commissioned a new distillery of 175 KLD with investment of | 230 crore in June-
2022. This would take the annual distillery volume to 11 crore litre in FY24. 50 5000
0 0
 Distillery revenue to grow at 42.7% CAGR in FY22-24E with 2x increase in

Dec-18

Dec-20

Dec-21
Dec-19
Jun-18

Jun-19

Jun-20

Jun-22
Jun-21
ethanol volumes and 6.4% increase in distillery realisation led by higher
proportion of B-heavy & sugarcane juice ethanol Dwarikesh Sugar NIFTY

 Higher exports aided by rising global sugar prices, sugarcane diversion

towards ethanol has led to Industry wide 6 MT inventory reduction since Particulars
2019 (likely to further fall by 1.5 MT by Sep-22), leading to firm sugar prices
Particulars (| crore) Amount
 With increasing profitability & reduction in sugar inventory, the company Market Capitalization 1,923.5
would be able to generate cumulative | 407 crore free cash flows in the Total Debt (FY22) 520.7
next two years. It would completely de-leverage the balance sheet Cash and Investments (FY22) 38.6
EV 2,405.6
Dwarikesh Sugar is continuously increasing its diversion toward ethanol, which is
fetching better profitability for the company. It has completed its distillery capex, 52 week H/L (|) 148 / 62

which has taken its ethanol production capacity from 5.5 crore litres pa to 11 crore Equity capital 18.8
litres pa. Moreover, the company is setting up sugar refinery to utilise high export Face value (|) 1.0
demand for refined sugar. This would improve its sugar realisation in future. We
remain positive on the sugar industry and the company. We maintain our BUY rating
and target price of | 145/share.

Exhibit 5: Financial summary for Dwarikesh Sugar

5 Year CAGR
Key Financials FY20 FY21 FY22 FY23E FY24E CAGR (FY22-24E)
(FY17-22)
Total Operating Income 1336.2 1838.9 1974.1 10.6% 2161.9 2262.9 7.1%
EBITDA 136.1 201.3 290.8 1.2% 307.6 423.1 20.6%
EBITDA Margin % 10.2 10.9 14.7 14.2 18.7
Net Profit 73.5 91.5 155.2 -0.1% 179.6 265.2 30.7%
EPS (|) 3.9 4.9 8.2 -0.1% 9.5 14.1 30.7%
P/E 26.2 21.0 12.4 10.7 7.3
RoNW % 15.2 15.8 23.1 21.0 25.2
RoCE (%) 9.0 14.4 20.6 20.3 30.0
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Sector Update | Sugar ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as
the analysts' valuation for a stock

Buy: >15%;
Hold: -5% to 15%;
Reduce: -5% to -15%;
Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]

ICICI Securities | Retail Research 5

 Sector Update | Sugar ICICI Direct Research

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