Helping You Build Wealth With Honest Research
Since 1996. Try Now

MEMBER'S LOGINX

     
Invalid Username / Password
   
     
   
     
 
Invalid Captcha
   
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

India's Third Giant Leap
Discover the Best Category of Stocks to Ride
this Mega Opportunity On February 29




**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


AD

Top 5 Biofuel Stocks to Add to your Watchlist

Sep 15, 2023

Top 5 Biofuel Stocks to Add to Your Watchlist

As part of the G20 presidency, one of the last initiatives India took was to form a Global Biofuel Alliance.

A total of 19 countries and 12 international organisations have agreed to join the alliance with India, USA, and Brazil, the founding member countries.

The alliance is aimed at creating and promoting the adoption of biofuels and expanding bioenergy access across the world.

But what exactly constitutes biofuels?

Biofuels are liquid fuels produced from renewable energy sources such as plants and algae. Some of the biofuels are ethanol biodiesel, green diesel, and biogas.

They provide solutions to the challenges of solar, wind, and other alternative energy sources.

Moreover, biofuels also have the potential to replace fossil fuels completely and decarbonise the transportation sector. This will help the world reach its carbon neutrality goals on time.

So, how does the biofuel alliance help India?

According to a report published by the Indian Biogas Association, the biofuel alliance can generate opportunities worth US$ 500 billion (bn) (Rs 4,153 bn) for G20 member countries in the next three years.

Given the tremendous availability of potential biomass in India, this is a huge opportunity for companies involved in the production of biofuels.

Let's look at the top biofuel companies in India that have the potential to capitalise on this trend.

#1 Praj Industries

First on the list is Praj Industries.

Incorporated in 1985, the company started its journey as a supplier of ethanol plants.

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

The company's bioenergy business offers a complete suite of solutions for the global ethanol industry, including process design, engineering, fabrication, and commissioning of ethanol plants.

Praj Industries has more than 50% market share in 1G ethanol, and it is the only player in the 2G ethanol business.

This makes the company a primary beneficiary of the government's ethanol blending program.

With the rising demand for biofuels, the company has taken several measures to strengthen biofuel production capacities in India.

It has collaborated with Axens, France, Sekab E-Technology AB, Sweden, and Indian Oil Corporation to produce sustainable aviation fuel (SAF), ethanol, compressed bio-gas (CBG), biodiesel, and bio-bitumen.

Praj Industries is also heavily investing in capex to build a multipurpose catalysis lab to work on fuels such as biohydrogen.

In the financial year 2023, it commissioned its first 2G ethanol biorefinery and rice straw-based commercial-scale CBG plant for the Indian Oil Corporation and Hindustan Petroleum Corporation, respectively.

In the last five years, the company's revenue has grown at a CAGR (compound annual growth rate) of 26.8%, driven by a growing order book pipeline. The net profit has also grown at a CAGR of 28.6%.

It also pays consistent dividends to shareholders with a five-year average dividend payout and a dividend yield of 52.3% and 1.7%, respectively.

To know more, check out Praj Industries' financial factsheet and latest quarterly results.

#2 Dwarikesh Sugar

Second on the list is Dwarikesh Sugar.

The company is primarily engaged in the business of manufacturing sugar and allied products.

It also produces power, ethanol, and industrial alcohol.

For the past few years, the company has been trying to consolidate itself from a sugar company into a bioenergy company.

To meet this goal, it has been investing a major portion of its capex towards expanding its distillery capacity. This helped the company grow its ethanol production from just 30 kilo-litres per day (KLPD) capacity to 337,500 KLPD in just five years.

At present, the company has three manufacturing plants for sugar, where it manufactures close to 4.5 m quintals of sugar.

However, the company plans to cut down its production by 30% and bring down the sugar manufacturing capacity to 3.3 m quintals from the financial year 2024 to focus on producing ethanol.

Dwarikesh Sugar has been running both of its ethanol plants at full capacity in order to increase its revenue share from ethanol. It also plans to increase its exports of ethanol as the demand for cleaner fuels is increasing.

Coming to its financials, the company's revenue has grown at a CAGR of 13.6% in the last five years on account of a growing share of ethanol. The net profit has grown at a CAGR of 2%.

The company started paying dividends to its shareholders in the last three years. The three-year average dividend payout and dividend yield stood at 28.6% and 2.9%, respectively.

For the financial year 2024, Dwarikesh Sugar plans to invest around Rs 250 m to increase its crushing capacity and annual maintenance capex.

Given the company's focus on ethanol and growing global demand for this biofuel, it is poised for growth in the medium term.

To know more, check out Dwarikesh Sugar's financial factsheet and latest quarterly results.

#3 Gulshan Polyols

Third on the list is Gulshan Polyols.

The company started off its journey as a manufacturer of chemicals such as calcium carbonate (CC) sorbitol, liquid glucose (LG), and starch.

However, it ventured into manufacturing ethanol. Today, it is India's leading manufacturer of ethanol/bio-fuel, grain, and mineral-based speciality products.

The company's products include grain-based extra-neutral alcohol (GENA), ethanol from damaged food grain, country liquor, starch sugar, sorbitol, liquid glucose, and animal nutrition products such as corn gluten.

At present, the company has a 60 KLPD capacity to manufacture ethanol. It has already invested Rs 3 billion (bn) in capex to expand this capacity by 500 KLPD.

Gulshan Polyols has also invested Rs 1.8 bn in a greenfield project to build an ethanol plant of capacity 250 KLPD.

This will take the company's total ethanol capacity to 900 KLPD by the end of the financial year 2024, making it a dominant player in the ethanol production market.

Given the growing demand for ethanol, the capacity expansion couldn't come at the right time.

With the new capacity all set to be operationalised by the end of 2023, the company's revenue and profits could potentially grow.

The company is already successfully supplying ethanol to IOCL, BPCL, HPCL, other Oil Marketing Companies (OMCs), Reliance and Nyara Energy for ethanol blending petroleum programs.

It has also entered long-term agreements to supply ethanol to OMCs. This will ensure a steady income for the company.

In the last five years, the revenue has grown at a CAGR of 12%, and the net profit grew by a CAGR of 16%.

The company also pays consistent dividends to its shareholders and has a five-year average dividend payout and dividend yield of 11.4% and 1.1%, respectively.

To know more, check out Gulshan Polyols' financial factsheet and latest quarterly results.

#4 Kotyark Industries

Next on the list is Kotyark Industries.

The company is engaged in the manufacturing of biodiesel and its by-products, such as glycerine.

It has a manufacturing capacity of 500 KLPD of biodiesel from multi-feedstock and other raw materials such as vegetable oils, alcohols, and catalysts.

The company has the advantage of being a pure-play biodiesel entity listed on the stock exchange in India.

Currently, the company's capacity utilisation is 10%. This gives the company an added advantage to expand without any additional capex.

Kotyark Industries sells its products to OMCs and bulk buyers. It also sells to retail customers through its mobile retail outlets.

At present, the company has 25 outlets across the country, which it plans to expand to 100 in the next two years.

Europe is the current leader for biodiesel production and consumption in the world, and India merely accounts for 1% of the world's production.

However, India aims to increase its production and consumption of biodiesel in the next few years.

As biodiesel adoption gains momentum in India, manufacturers like Kotyark Industries are poised for growth.

The government is also supporting biodiesel production through initiatives such as the National Policy on Biofuels and compulsory blending of 5% biodiesel in diesel by 2030.

All these show that the company is set to become a major player in the biodiesel industry as the adoption of biodiesel increases in the country.

In the last five years, the revenue and net profit of the company have grown at a CAGR of 34.5% and 87.1% on account of growth in volumes of biodiesel and glycerine.

To know more, check out Kotyark's financial factsheet and latest quarterly results.

#5 EID Parry

Last on the list is EID Parry.

The company is engaged in manufacturing sugar, nutraceuticals, ethanol, and power.

Part of the Murugappa group, the company is planning to transform into a bioenergy, food, and nutrition firm.

Currently, the company is one of the major producers of sugar in South India, with a crushing capacity of 40,300 tonnes of cane per day.

It is also India's first company to install a distillery and the first sugar manufacturer in India to produce ethanol from B-heavy molasses and sugar syrup at its Nellikuppam plant, with the process validated by the National Sugar Institute, Kanpur.

At present, the company has an ethanol production capacity of 417 KLPD. It plans to expand to 582 KLPD by the end of the financial year 2024 by investing Rs 2.8 bn.

Of this, a capacity of 120 KLPD is for manufacturing grain-based ethanol at its Sankili plant.

The extended capacity will be used to produce ethanol from syrup and B-heavy molasses. Commercial production from the expanded capacity is expected to commence in April 2024.

The company's financial performance has improved with the revenue and net profit growth (CAGR) at 16.3% and 33.1% in the last five years.

Healthy volume growth and high price realisation from sugar and ethanol have aided the financial performance.

Despite investing heavily in capex, the company managed to remain debt-free in the last three years on account of healthy cashflows.

With the government's ethanol blending policy and now the global biofuel alliance, the company is poised for growth.

Given its established presence in the sugar industry, it won't be long before the company becomes a leading player in the biofuel industry as well.

To know more, check out EID Parry's financial factsheet and latest quarterly results.

Why should you invest in biofuel stocks?

The current biogas and compressed biogas (CBG) production in India is 1,151 million tons (MT) per day. Even with a slight push to the industry, it can easily go up to 1,750 MT per day by 2025.

With the availability of biomass in India, India has the potential to produce ten times more, that is, close to 170,000 MT of CBG per day.

If India reaches this target, it will be able to replace one-third of the crude oil imports or three times the liquified natural gas (LNG) imports.

To reach this potential, the government is aiming to set up close to 5,000 biogas plants.

Moreover, through various policies like the ethanol blending program, which aims to reach 20% blending by 2025, and the National Policy on Biofuels, the Indian government is promoting the adoption and production of biofuels.

This puts Indian biofuel companies in a sweet spot.

However, there are several challenges that these companies face.

The research and development (R&D) that goes into producing biofuels isn't cost-effective. Moreover, the cost of setting up one biofuel plant is around US$ 4.25 m (Rs 353 m).

This can limit the profits of companies involved in producing biofuels.

Hence, it is important to do your research and due diligence when considering biofuel companies for investment.

Happy Investing!

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Safe Stocks to Ride India's Lithium Megatrend

Lithium is the new oil. It is the key component of electric batteries.

There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.

So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.

If you're an investor, then you simply cannot ignore this opportunity.

Click Here for Full Details

Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com

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...

Equitymaster requests your view! Post a comment on "Top 5 Biofuel Stocks to Add to your Watchlist". Click here!