CRISIL Ratings: 20% ethanol blending goal means more sugarcane utilisation

Industry's sugar inventory level and cash flows of millers shall also improve

India's aim to blend 20% ethanol in petrol by ESY1 2025 - or ~990 crore litre annually - will require effective utilisation of both grain and sugarcane feedstock2 to increase its supply.

Annual ethanol production from grains is expected to see a significant increase to ~600 crore litre by the next season (this season's production estimate is ~380 crore litre; see chart 1). The balance will have to be produced by processing ethanol from sugarcane, which is viable given the substantial capacity in place.

This, in turn, can help optimise sugar inventory, particularly considering the high carry-over stock expected at the end of the current season owing to the government restriction on diversion for ethanol production and exports.

A CRISIL Ratings analysis of 17 integrated sugar mills, accounting for about one-third of sugar-based ethanol supply, indicates as much.

Blending ethanol helps reduce India's dependence on crude oil imports. The ethanol blending rate has steadily risen 200-300 basis points each season since ESY 2021.

While grain utilisation for producing ethanol is not controlled, the government determines the quantum of sugarcane utilisation based on its estimation of demand-supply balance of sugar for the year ahead.

Last year's erratic rainfall is expected to have impacted sugarcane production3 this year. Consequently, ethanol production from the sugarcane route is expected to be restricted to ~250 crore litre (equivalent of 2.5 million tonne of sugar) this season.

Says Poonam Upadhyay, Director, CRISIL Ratings, "Ethanol blending could still improve to 14%4 in ESY 2024 as extraction from grains has significantly risen due to 40% capacity expansion. That will compensate for the reduced output from sugarcane. However, to reach the 20% blending target by ESY 2025, allocating sugarcane required to produce ~4 million tonne of sugar can be considered for ethanol production, similar to the season 2023."

In the upcoming season 2025, gross sugar production is expected to be ~33.5 million tonne, with consumption at ~29.5 million tonne. Additionally, sugar inventories are projected to be healthy by the end of this season.

Hence, allowing sugarcane - equivalent to the quantity required to produce 4 million tonne of sugar - for ethanol supply (~390 crore litre) can be considered, while the larger remaining share will be sourced from grain-based route.

Says Anil More, Associate Director, CRISIL Ratings, "Higher sugarcane usage for ethanol production will also help optimise sugar inventory, which is estimated to rise to about 4 months of consumption (~8 million tonne) by the end of this season. Besides, it can positively impact the cash flows of sugar mills and help them pay cane dues to farmers on time."

In the road ahead, the policy on quantum of sugarcane allowed next season and availability and prices of grain-based feedstock will bear watching.

Source : Equity Bulls

Keywords

CRISIL INE007A01025 EthanolBlending Goal Sugarcane