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  • Jul 11, 2022 - Ethanol Stocks are in a Sweet Spot. But for How Long?

Ethanol Stocks are in a Sweet Spot. But for How Long?

Jul 11, 2022

Ethanol Stocks are in a Sweet Spot. But for How Long?

It was a bright Wednesday morning. I was extra excited about school that day because Wednesdays were sports days for us.

But all my excitement went down the drain when I got to know that I could not play if my shoes were not polished.

Thanks to my 'I-can-reach-everywhere-at-last-moment' syndrome, I didn't have time to polish my shoes.

But I also have a 'I-don't-give-up-easily' syndrome. So I really needed some way to make my shoes appear polished. And that is how I invented polishing shoes with chalk.

Sure, it wasn't a long term solution but it helped me play sports that day.

Until that day, I had only heard that necessity is the mother of invention but that day I realised it too. And very recently I had to live this again.

It was a chilly Wednesday morning. It was a gloomy day for share markets. Just another regular day of 2022.

While looking at share price data of various companies, I came across Praj Industries and its performance surprised me.

I anxiously looked at the price and performance of other top ethanol stocks and they were all shooting up. I wondered why...

And after a lot of research, I realised it is rightly said that necessity is the mother of invention because it was the necessity of reducing India's carbon emissions that led to the use of ethanol as a biofuel.

The need for alternatives...

The need for an alternative for crude oil was high as India's oil imports had significantly increased. Increasing crude oil prices were adding insult to the injury of high imports (although crude oil prices have started to fall lately).

Thus, the government was looking for ways to mitigate both problems.

Enter ethanol.

Since the government announced its initiative to use ethanol in combination with petrol, the entire industry was overjoyed. Ethanol stocks in a sweet spot.

Ethanol stocks are in a sweet spot.

Why are ethanol stocks finding favour though?

After all, it's a highly commoditised industry with no pricing power whatsoever.

And if this isn't enough, the sector usually finds itself at the receiving end of regulatory overkill.

Ethanol is produced from molasses which is typically a by-product of sugar. Hence increasing the use of ethanol has brought good news to sugar manufacturers.

It is one of those rare initiatives of the government, that has not stayed only on paper. We have already achieved the target of the use of 10% ethanol blending, way before it was supposed to be achieved.

India is the third-largest emitter of carbon dioxide in the world. The government aims to reduce the carbon print by 30-35% by 2030 from the 2005 level.

For the last eight to ten years, India has been facing the problem of excess sugar production, which can also be fixed by producing more ethanol.

Hence increasing demand and need for ethanol has sent ethanol stocks into a sugar rush.

And since ethanol is an important by-product for all sugar manufacturers, both the demand and realisations for ethanol are likely to receive a big boost.

In fact, just to meet this demand, sugar manufacturers will have to set up additional ethanol manufacturing capacities and in a big way at that.

The market is obviously seeing this move as a big positive for the sector. Not only is the ethanol offtake going to be huge, it is also going to be a recurring source of revenues for sugar companies for a long time to come.

India's Top Ethanol Stocks

#1 Praj Industries

Praj is a globally leading company with a bouquet of sustainable solutions for bioenergy, high purity water, critical process equipment, breweries and industrial wastewater treatment.

Praj Industries took the maximum benefit of government's ethanol blending policy. It bagged the order for building set up India's largest capacity syrup based ethanol plant from Godavari Biorefineries (GBL) in Karnataka.

As a result, it turned out to be a multibagger stock for its investors.

#2 Shree Renuka Sugars

Shree Renuka Sugars is one of India's largest manufacturers of sugar. It is an integrated manufacturing company with strategic focus on sugar and its allied products in power and ethanol.

In its latest quarterly results, Shree Renuka Sugars' profits increased by 22% and revenues grew by 58% compared to same quarter last year.

One of the factors contributing to better financial performance was increased realisations form the ethanol division which has sent the company into a sugar rush.

#3 Balrampur Chini Mills

Balrampur Chini Mills is the second largest producer of sugar in India. It's now transforming into an energy company.

The company was focused on bringing down its sugar production by 20% to increase its ethanol production to make gains from the growing ethanol opportunity.

It is gradually increasing its ethanol manufacturing capacity.

For more details, check out the entire list of ethanol stocks in India.

How long will sugar be sweet?

The government has preponed the target of 20% ethanol blending to 2025, which means that the demand for ethanol will increase.

This might mean that the sugar rush in ethanol stocks is not going anywhere.

However, when we talk about change in automobile industries or the government's initiative to reduce carbon emissions, it is impossible not to mention electric vehicles (EVs).

If the EV industry continues the progress, then soon, there will be a time when vehicles won't even need fuel to run.

They will only need a proper charging station to run and no fuel at all.

The government is making a two-pronged effort. It is pushing the EV industry simultaneously while boosting its ethanol blending policy.

But what happens when the EV industry is fully operational? What happens when we have vehicles that cost more initially but then require low maintenance because no fuel is needed to run them?

In that case, what will happen to ethanol? Will there be sufficient demand for ethanol to keep the industry going?

Only time will tell...

But one thing is for sure. The transition to electric vehicles would take some time as the EV industry is still at a nascent stage.

There will be hurdles as well...case in point the recent burning up of EVs. This may dampen the prospects and slow down the transition.

So for the near term, ethanol stocks will continue to remain in a sweet spot.

Investment Takeaway

Ethanol stocks are not going anywhere soon. Before the automobile industry gets all electrified, ethanol is the only way out.

To run a full-fledged EV industry is no joke. Right from manufacturing strong and sturdy vehicles to installing charging stations all over the country, to installing chargers at homes, hotels, and apartments, the EV industry is making a big change.

This change is neither easy nor coming any time soon. But it is also inevitable because using more ethanol means using more agricultural land for sugarcane production, which might disrupt the agri cycle.

Also, the increasing use of ethanol results in a low reduction of carbon emission compared to EVs.

Due to these shortcomings, ethanol cannot be the future alone.

Hence it seems like ethanol will address the present needs and EVs will solve future problems.

There might be a phase of transition where both EVs and bio-fuel vehicles will exist simultaneously.

Hence ethanol and ethanol stocks will have a strong presence in the market for some time. An investor should carefully analyse and then decide when he should switch his lanes from ethanol to EV.

To stay updated about the developments in EVs and ethanol, stay tuned.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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