Top 5 Stocks to Benefit as Government Removes Cap on Ethanol Diversion

Ethanol stocks are soaring once again, with shares of leading sugar companies surging by up to 13% on 30 August 2024.

This renewed excitement stems from a game-changing policy shift by the Union government, which now permits sugar mills to use cane juice or syrup for ethanol production in the Ethanol Supply Year (ESY) 2024-25, beginning on 1 November 2024.

The new policy, announced on 29 August 2024, also removes the previous cap on sugar diversion for ethanol and allows the use of B-Heavy and C-Heavy molasses for production.

This move is a major boost for the government's renewable energy initiatives, aiming to reduce fossil fuel dependency.

In light of this, here are the top five stocks set to benefit most from this ethanol-driven approval.

#1 EID Parry

First on the list is EID Parry.

Following the union government's approval, its shares surged by up to 6% intraday.

This reaction is driven by EID Parry's strong foundation in sugar production and ethanol processing, which positions the company to capitalise on the new policy shift.

EID Parry has already made significant strides in the ethanol sector by becoming the first sugar manufacturer in India to produce ethanol from B-heavy molasses and sugar syrup at its Nellikuppam plant.

This achievement, validated by the National Sugar Institute in Kanpur, underscores the company's innovation and readiness to adapt to policy changes.

The recent government approval to allow sugar mills to use cane juice, syrup, B-Heavy molasses, and C-Heavy molasses for ethanol production directly benefits EID Parry.

The removal of the cap on sugar diversion for ethanol gives the company greater flexibility to maximize its ethanol output.

With multiple distilleries across India, EID Parry already produces ethanol from sugarcane molasses, sourcing it sustainably from its own sugar mills and other suppliers.

As demand for ethanol-blended fuels continues to rise, EID Parry is set to benefit from higher production volumes, leading to increased revenues.

The company's established infrastructure, sustainable practices, and early adoption of ethanol production from alternative sources, place it in an advantageous position to leverage the government's push toward renewable energy.

Additionally, the company operates in regions with minimal competition, possesses cutting-edge equipment to boost productivity, and has access to quality raw materials 5-6 months in advance, further strengthening its position in the ethanol market.

For more details, see the EID Parry company fact sheet and quarterly results.

#2 Praj Industries

Next on the list is Praj Industries.

Following the update shares of Praj Industries shot up 10% intraday.

As a pioneer in ethanol technology solutions, Praj Industries is well-positioned to capitalise on the new policy changes.

The company has established itself as a leading biofuel technology provider, offering cutting-edge technologies to the distillery industry with a presence across five continents.

Praj Industries commands over 70% of the market share in India for 2G ethanol technology, and its influence extends globally, contributing to about 10% of ethanol production worldwide (excluding China).

The company's expertise is not just limited to India but spans across Africa and Southeast Asia, where it has successfully installed various projects.

In a recent strategic move, Brazil-based renewable energy company Be8 entered into a license agreement with Praj Industries to establish the process, design, and engineering of its first ethanol plant in Passo Fundo, Rio Grande do Sul, Brazil.

Praj also marked a significant milestone in June 2024 by inaugurating its first grain-based ethanol project in Brazil, the world's ethanol capital.

The company is building state-of-the-art modules for one of Europe's largest Blue Hydrogen projects and is designing three alcohol-to-jet sustainable aviation fuel (SAF) plants in the US.

Additionally, Praj has supplied a large alcohol-to-jet modular demonstration unit in the USA for converting Isobutanol to SAF. A French company has also contracted Praj to set up a greenfield plant in Ivory Coast, Africa.

Domestically, Praj Industries has seen significant growth in its energy business, driven largely by starch-based ethanol plants, which make up 90% of its domestic order book.

The company is actively engaging with several customers to transition from single-feedstock to multi-feedstock systems, a move that will further strengthen its market position.

The recent policy change by the union government, which allows the use of cane juice, syrup, and various molasses for ethanol production, plays directly into Praj Industries' strengths.

With its advanced technology and extensive experience in the ethanol sector, Praj is set to benefit significantly from the anticipated increase in ethanol production and demand.

For more details, see the Praj Industries company fact sheet and quarterly results.

#3 Balrampur Chini Mills

Next on the list is Balrampur Chini Mills.

Shares of Balrampur Chini Mills zoomed 8% intraday after the policy announcement.

This strong market response reflects the company's strategic position in the ethanol and sugar industries.

Balrampur Chini Mills Limited (BCML) is a Kolkata-based sugar producer that also plays a significant role in ethanol production.

The company operates four distilleries in Uttar Pradesh, with a total production capacity of 560 kiloliters per day (KLPD).

BCML's ethanol is primarily used for blending with petrol and is supplied to oil marketing companies, making it a crucial player in India's ethanol supply chain.

The company accounts for about 5% of India's total ethanol production and over 30% of Uttar Pradesh's production, underscoring its importance in the sector.

Currently, BCML operates in three segments: sugar, distillery, and others. It manages 10 sugar plants in Uttar Pradesh with a crushing capacity of 80,000 tonnes of cane per day, a distillery capacity of 1,050 KLPD, and a co-generation capacity of 175.7 MW.

The company's recent expansion efforts include setting up a 320 KLPD distillery at its Maizapur unit and a 170 KLPD distillery at its Balrampur unit.

These facilities are designed to run on sugarcane juice during the crushing season and on grains during the off-season. With these additions, BCML's total distillation capacity has increased to 1,050 KLPD.

BCML's expertise in ethanol production positions it to benefit significantly from the government's new policy, which allows the use of cane juice, syrup, and various molasses for ethanol production.

This policy change will enable BCML to maximize its ethanol output, leading to higher revenues as demand for ethanol-blended fuels rises.

In addition to its ethanol operations, BCML is pushing the boundaries of innovation with the development of India's first industrial bioplastics plant.

This facility will use sugarcane as a raw material for producing polylactic acid (PLA), a plant-based alternative to traditional plastics. Targeted for completion in 2027, the bioplastics plant represents a significant diversification for the company.

BCML plans to invest Rs 20 billion (bn) in the bioplastics unit, leveraging internal accruals of Rs 8 bn and manageable debt of Rs 12 bn to fund the investment.

#4 Shree Renuka Sugars

Next on the list is Shree Renuka Sugars.

Shares of Shree Renuka sugars zoomed 10% on the 30 August 2024 post-policy announcement.

This is recognised for its pioneering use of sugarcane juice in ethanol production. A method that not only enhances its contribution to the ethanol-blending program but also helps manage its sugar inventories effectively.

As of March 2023, Shree Renuka Sugars operates with a significant ethanol production capacity of 1,250 kiloliters per day (KLPD), marking a substantial increase from its earlier capacity of 720 KLPD.

This expanded capacity supports various applications, including ethanol for blending with petrol, which aligns with the government's push towards increasing biofuel usage.

With the recent policy approval allowing the use of cane juice, syrup, and various molasses for ethanol production, Shree Renuka Sugars is set to benefit greatly.

Shree Renuka Sugars' strong infrastructure and its early adoption of sugarcane juice for ethanol production position it to capitalise on the anticipated growth in the ethanol sector.

The company produces three main grades of ethanol: Absolute Alcohol (AA), Extra Neutral Alcohol (ENA), and Rectified Spirit (RS).

Shree Renuka Sugars supplies these different ethanol grades to a diverse range of industries. Its products are distributed across the oil marketing sector, where the company is a leading supplier, the potable alcohol industry, and the chemical industry.

Going forward, the company plans to upgrade existing distilleries with advanced technology to improve efficiency.

For more details, see the Shree Renuka Sugars company fact sheet and quarterly results.

#5 Triveni Engineering

Last on the list is Triveni Engineering & Industries.

Triveni Engineering & Industries is well-positioned to reap substantial benefits from the recent policy change, which allows the use of cane juice, syrup, and various molasses for ethanol production.

Due to this, shares of Triveni Engineering & Industries rallied 9%.

As a key member of the Triveni Group, the company already operates state-of-the-art distilleries across Uttar Pradesh, with a combined distillation capacity of 860 KLPD.

This infrastructure, coupled with its expertise in utilising sugarcane-based feedstocks and grain, sets the stage for Triveni to significantly ramp up its ethanol production.

The company's advanced distilleries produce a range of products, including ethanol, Extra Neutral Alcohol (ENA), Rectified Spirit (RS), and Denatured Spirit (SDS).

The removal of the cap on sugar diversion for ethanol gives Triveni the flexibility to optimise its production processes, allowing for an increased focus on ethanol output.

This will enable the company to further support the government's Ethanol Blending Programme (EBP), a commitment that Triveni has already demonstrated by achieving higher production and sales of ethanol in FY24 compared to the previous year.

Moreover, the policy change aligns perfectly with Triveni's long-term strategy of expanding its ethanol business and contributing to India's self-reliance goals.

By leveraging its existing infrastructure and operational expertise, Triveni can quickly adapt to the new policy, increasing its ethanol production capacity to meet the rising demand for ethanol-blended fuels.

This will not only enhance its market presence but also drive revenue growth as the company supplies ethanol to major oil marketing companies and private players for blending with petrol.

For more details, see the Triveni Engineering company fact sheet and quarterly results.

Conclusion

India is poised to significantly boost its ethanol production to 9.90 bn litres by 2025, utilising grain and sugarcane as key feedstock.

This ambitious goal is central to the government's broader strategy to enhance energy security, reduce carbon emissions, and decrease dependence on fossil fuels.

With the target of achieving 20% ethanol blending with petrol by 2025, up from the current 10%, the ethanol sector is expected to witness substantial growth, presenting a lucrative opportunity for investors.

Ethanol has emerged as a significant contributor to the renewable energy sector, driven by government initiatives to promote higher ethanol blending, which reduces fossil fuel use and lowers pollution.

The Ministry of Petroleum and Natural Gas has been instrumental in supporting this growth by encouraging investments in ethanol production infrastructure and offering financial incentives to producers.

This has spurred public and private sector investments, particularly in regions with abundant grain and sugarcane production.

However, investors should be mindful of the cyclical nature of the sugar industry, which can impact ethanol production.

Additionally, regulatory changes, climate conditions, and fluctuating raw material costs can affect the profitability of ethanol-producing companies.

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