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  • Oct 15, 2023 - India's Ethanol Sector: A Lucrative Investment Opportunity for 2023 and Beyond

India's Ethanol Sector: A Lucrative Investment Opportunity for 2023 and Beyond

Oct 15, 2023

India's Ethanol Sector: A Lucrative Investment Opportunity for 2023 and Beyond

Ethanol is largely produced in India as a byproduct of the country's sugar industry and is sourced from sugarcane. An essential industrial chemical, Ethanol is used in a variety of products including plastics, polishes, medicines, cosmetics, plasticizers, alcoholic beverages, and more. Notably, major sugar producers in India have emerged as significant Ethanol manufacturers.

Brazil is the biggest producer of sugar in the world, accounting for 34%, and India stands at 2nd position for 33% as of FY 2022-23 and has been a major exporter in recent years. A significant amount of sugar is also produced in the European Union, China, Thailand, and the United States.

In the wake of recent climate change initiatives, several nations are turning to Ethanol. This has led to an increase in Ethanol prices in present times. India's major sugar producers consequently rank among the top Ethanol producers. Ethanol holds the potential to mitigate the environmental impact of crude-based products, thus curbing pollution.

What is Ethanol?

Ethanol is a renewable fuel made from plant materials called biomass. It includes food grains, grass, trees, sawdust, agricultural and forestry residues etc. However, employing crops with a high sugar content, such as sugarcane, corn, sorghum, barley, sugar beets, etc., makes producing Ethanol fuel the simplest.

In the past, businesses that made sugar would remove the juice from sugarcane, discarding the cane. However, thanks to innovative ideologies, this cane waste, also known as sugarcane molasses, is passed through distilleries to create the multipurpose industrial chemical Ethanol.

One of the most important and effective sources of biomass for the manufacture of biofuel (Ethanol) is generally recognized to be sugarcane. It provides substitutes for food production, including feed, fibre, and energy, particularly the co-generation of Ethanol and electricity.

As a result, sugarcane crop production is increasing positively, and industries that make sugar are essential to the manufacturing of Ethanol. India produced 69 metric tonnes of sugarcane per hectare in 2017. In FY 2022-2023, this grew to 84 metric tonnes per hectare.

On the other hand, India's heavy reliance on crude oil imports, which account for 82% of its consumption, positions India as a major global importer of petroleum products. The Indian government is now actively investigating several solutions to address this issue, including boosting renewable energy sources and incorporating Ethanol as a petrol substitute.

[Read: Best Mutual Funds to Invest in Renewable Energy in India]

Ethanol has been used as a fuel since the early 20th century. This was the first time it was utilised as a gasoline additive in the United States to raise octane ratings and lower air pollution. However, in the early 2000s, the Indian Government realised that Ethanol had potential as a renewable fuel. Since then, Ethanol fuel output and consumption have been constantly rising.

The Ethanol sector is expanding as a result of the growing need for cleaner energy sources. This tendency is also being aided by the government's drive towards renewable and green energy sources. Since it can reduce the nation's need to import oil by billions of dollars while also protecting the environment, Ethanol is regarded as the next superfuel.

This article delves into the landscape of the Indian Ethanol industry, shedding light on prominent Ethanol companies that are experiencing rapid expansion. So, continue reading! for an in-depth understanding of this market segment.

The Indian Ethanol Industry: A Fuel That Leads Path to a Sustainable Future

Due to the emphasis on using environmentally friendly products during the last few years, Ethanol consumption has increased. The government recently declared its intention to attain net zero emissions by 2070.

The government is looking into many cleaner energy sources to help accomplish this goal, and Ethanol is one of the most well-known options. India will be able to meet these sustainability objectives with the aid of Ethanol and the electric vehicle industry.

[Read: Top 5 Mutual Funds with High Exposure to EV Revolution]

Having said that, a 90:10 combination of Ethanol and petrol aids in lowering carbon emissions by reducing tailpipe emissions. Due to this, the government has made it mandatory to use this ratio in blended fuel. In the near future, they also intend to raise this ratio from 90:10 to 90:20.

While factors like overall transportation fuel demand, pricing dynamics, and specific regulatory frameworks have contributed to the Ethanol market trend, governmental policies have played a pivotal role in steering this demand.

Union Minister for Consumer Affairs, Food and Public Distribution, Textiles and Commerce and Industry, Mr Piyush Goyal, while addressing the 'National Seminar on Maize to Ethanol' said that over the previous nine years, the sugar industry had been self-sufficient, with more than 99.9% payment to farmers for the previous season. Now, Ethanol will assist maize farmers in increasing their income and aid sugarcane farmers in experiencing growth and stability.

Ethanol Blended Petrol (EBP), which the government is promoting, would replace petroleum. The average percentage of Ethanol blended with petroleum in India is predicted to be 11.5% in 2023. By 2025, the government hopes to attain a 20% Ethanol blend through the E-20 fuel program.

With the availability of Ethanol pumps, sugar businesses can effectively use their cane supply. The government has also urged automakers to begin creating Flex Fuel Vehicles (FFV), which can run entirely on either petrol or entirely on bioethanol. In fact, FFV development has already begun at Bajaj Auto and TVS Motors.

As per the research conducted by the International Energy Agency, India will surpass Brazil and the United States of America to become the third-largest economy for Ethanol by 2026. Consequently, future predictions point toward a substantial upswing in Ethanol demand.

Should One consider investing in Ethanol Stocks?

You see, as the government encourages renewable and clean energy to reduce carbon emissions and improve air quality, investing in Ethanol stocks in India could be a wise choice for investors. That said, a number of organisations are engaged in the massive production of Ethanol in India alone. Our nation is one of the largest producers of Ethanol in the world and continues to increase its production capacity in coming years.

Compared to other fuels like crude oil, Ethanol is a more environmentally benign energy source. As a result, this will offer sugar and alcohol producers an excellent opportunity for expansion. Consequently, this would skyrocket the Ethanol demand and its prices, thus propelling Ethanol stocks. One of the main reasons to consider investing in Ethanol is speculation about future demand.

However, note that the sugar business's financial viability, which is inextricably linked to variables like monsoon patterns, the availability of irrigation, and total water supplies, has a significant impact on Ethanol stock prices. Insufficient water supply can impact sugarcane cultivation, a water-intensive crop. As a result, direct equity investment in Ethanol stocks could be highly risky and not suitable for all investors.

Alternatively, one may consider investing in Ethanol stocks, which is the fuel of the future, through mutual funds. It could assist in mitigating the high risk and provide a diversified equity portfolio. However, keep in mind that even mutual funds could lose value if the market declines or the sectors fall out of favour.

Here's a list of a few mutual funds that hold a significant allocation to Ethanol stocks or Ethanol manufacturing companies.

1# - Taurus Infrastructure Fund (Sectoral Fund)

Taurus Infrastructure Fund aims at investing predominantly in equity and equity-related securities of the companies belonging to the infrastructure sector and its related industries.

It invests across the market cap, and as of August 2023, it holds 43.08% allocation in large caps, 16.12.80% allocation in mid-caps and 40.04% in small caps. As of August 2023, the scheme holds an overall allocation of 5.28% in Ethanol stocks of Praj Industries Ltd. It is one of the top 10 holdings of the fund.

Praj Industries is the leading Ethanol producer in India, with its business verticals in bioenergy, water and wastewater treatment. Under Bioenergy technology solutions, it serves more than 75 countries worldwide with fuel-grade Ethanol in compliance with country specifications such as 1G Ethanol, 2G Ethanol and so on.

#2 - Bank of India Small Cap Fund (Market Cap Fund)

Launched in December 2018, the Bank of India Small Cap Fund invests predominantly in equity and equity-related instruments of Small Cap Companies (companies ranking from 251 onwards in terms of market capitalisation).

Being a Small Cap fund, the scheme holds a higher exposure to small-cap stocks, which are highly risky in nature. As of August 2023, the fund has a very low allocation in large-cap stocks of 3.54% and 11.35% in mid-cap stocks, whereas 77.08% in small-cap stocks. Thus, before investing in this scheme, one must consider their suitability based on risk appetite and investment horizon.

The scheme holds an overall allocation of 4.64% in Ethanol stocks; it includes exposure to market leaders in the sugar industry - like 1.33% in Balarampur Chini Mills Ltd., which is one of the largest integrated sugar producers in India.

The business is also involved in Ethanol production of over 65 million litres annually. Geographically, they have a strong presence in Uttar Pradesh, which is the leading sugarcane-producing state in India. Further, the scheme has a 0.78% allocation to East India Distilleries (E.I.D.)- Parry (India) Ltd. and 2.53% to Praj Industries Ltd.

#3 - Bank of India Tax Advantage Fund (ELSS Fund)

Bank of India Tax Advantage Fund aims to form a diversified portfolio of equity and equity-related securities across all market capitalisations. It is a tax-saving equity mutual fund with a lock-in period of 3 years.

This ELSS scheme invests across market cap, and as of August 2023, it holds 53.93% allocation in large caps, 26.83% in mid-caps, and 18.25% in small caps. This scheme is mainly suitable for Individuals who wish to avail tax benefits from their investments under Section 80C of the Income Tax Act, 1961. Ensure your suitability to the fund before considering any investment.

Currently, the scheme has an AUM of Rs 843.13 crore, and it has an overall allocation of 4.56% to Ethanol stocks. As of August 2023, the scheme holds a fair allocation of 1.90% to Balrampur Chini Mills Ltd. and 1.34% to E.I.D. - Parry (India) Ltd., which specialises in producing nutraceuticals and operates several sugar mills and Ethanol distilleries in Tamil Nadu for the past 225 years.

The company has a total sugarcane crushing capacity of 35,000 tonnes per day and produces over 3,00,000 tonnes of sugar and 105 million litres of Ethanol annually. The scheme also holds 1.32% allocation in Triveni Engineering & Industries Ltd., which is the second-largest producer of sugar.

#4 - Bank of India Flexi Cap Fund (Market Cap Fund)

Launched a few years back in June 2020, the Bank of India Flexi Cap Fund aims to offer capital appreciation by investing predominantly in equity and equity-related securities across market capitalisations.

The scheme invests across market caps with a major allocation of 46.13% to large caps, 25.30% to mid-caps and 22.34% to small caps as of August 2023.

The scheme holds an overall allocation of 4.36% to the Ethanol stocks. This includes 2.35% allocation to Balrampur Chini Mills Ltd. and 0.89% to E.I.D. - Parry (India) Ltd. It also holds 1.11% in Triveni Engineering & Industries Ltd., an Indian conglomerate with diverse engineering and sugar businesses. The company works in Ethanol production, sugar and alcohol production, power co-generation, power transmission, etc.

Bear in mind that the scheme is new in the market and does not carry a long performance track record; thus, investors may consider their suitability before investing in this scheme.

#5 - DSP Small Cap Fund (Thematic Fund)

DSP Small Cap Fund aims to form a portfolio that is substantially constituted of equity and equity-related securities of small cap companies. The scheme has an AUM of Rs 12,083.53 crore and is benchmarked against Nifty 50 TRI.

The scheme holds an overall allocation of 2.91% in Ethanol stocks of Dwarikesh Sugar Industries Ltd., specialises in the production of sugar and related goods. It also holds a 2.60% allocation to Triveni Engineering & Industries Ltd., which is one of the top holdings of the scheme.

As of August 2023, the scheme holds 83.69% allocation to small cap stocks, which are considered highly risky. It holds 1.05% and 10% in large and mid-cap stocks, respectively. However, do note that the scheme invests a majority of its assets in small cap stocks, and investors must ensure their suitability before investing.

*(All the scheme related data is collated by PersonalFN Research, Source: ACE MF)

To summarize...

Ethanol stands as a significant megafuel with far-reaching implications. Given the government's financial incentives and the general increase in Ethanol consumption, Indian Ethanol companies may end up being the underdog in the years to come.

Furthermore, since it is a commodity, Ethanol can be used as a hedge against inflation. Investing in Ethanol stocks may help protect your capital's purchasing power during periods of rising prices, as the price of commodities like Ethanol tends to rise with inflation, providing a valuable asset for long-term financial stability.

All things considered, it is evident that the Indian Ethanol industry will always be in demand due to its high sustainability and growth potential. However, by adopting a diversified investment strategy and a long-term outlook, investors could position themselves to benefit from India's green engine of growth, the Ethanol revolution.

This article first appeared on PersonalFN here

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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