India is targeting to achieve net-zero carbon emissions by 2070. To meet this, the government has rolled out a series of policies for the efficient use of energy across various economic sectors. Ethanol Blending Programme is one such programme, under which the government is aiming to achieve 20% blending of ethanol with petrol (E20) by 2025. India is a net importer of petroleum, most of which is used as fuel in transportation. E20 has many advantages as it will reduce imports, resulting in savings
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In addition, ethanol is a more environmentally friendly fuel. E20 has put the spotlight on companies such as sugar manufacturers and producers of alcohol spirits, who are also involved in the production of ethanol.
What are ethanol stocks?
The government’s focus on green growth through programs such as E20 has made investors interested in ethanol stocks given their potential. Sugar companies, which are seen as a proxy for ethanol stocks, are benefiting from the program because it involves procurement directly from them. The progress of the scheme, given the procurement of blended ethanol by oil marketing companies, has made it favorable for the companies to ramp up production as it gives predictability to their earnings profile.
Last month, E20 fuel was launched at 84 retail outlets of oil marketing companies in 11 states and the union territories. The production capacity of companies is the key factor that will help investors choose from the list of best ethanol stocks to buy in 2023.
What is the sugar season in the state?
The sugarcane crop can take anywhere from 10-18 months to mature. However, a variety that matures in 12 months is grown widely in the country. In UP, the sowing of sugarcane begins in October-November, and harvesting takes place from October-December of the following year.
Some of the best ethanol stocks are listed below:
Shree Renuka Sugars Limited
Shree Renuka Sugars (NS:SRES) is India's largest sugar refiner and ethanol producer based in Mumbai, Maharashtra, with a refining capacity of 4000 tonnes/day and a distillery capacity of 600 kilolitre/day. It accounted for 20% of India's international sugar contribution in 2019. One of the largest sugar producers in the world is among the top ethanol stocks in India. Shree Renuka Sugars has eleven mills globally, of which four are in Centre-South Brazil and the remaining seven in India, with integrated ethanol and power co-generation capacity. It manufactures fuel-grade ethanol that can be blended with petrol and has a distillery capacity of a 930-kilo litre per day (klpd).
1 year = -4.13%
E.I.D.-Parry (India)
E.I.D-Parry (India) (NS:EIDP) is an Indian public company headquartered in Chennai, Tamil Nadu (NS:TNNP) that has been in business for more than 225 years. It has many firsts to its credit, including the manufacturing of fertilizers for the first time in the Indian subcontinent. The company is currently engaged in the manufacturing and marketing of sugar and bio-products.
Parry's is the oldest surviving mercantile name in Chennai. Among the ethanol stocks, this Chennai-based company that is part of the Murugappa Group is not only the leading sugar manufacturer in India but also has operations in the nutraceuticals space. E.I.D.-Parry has charted out plans to spend INR 268 crore in the financial year FY24 to augment ethanol production capacity. Given its business history, investors are betting on the company as among the best ethanol stocks.
1 year = -11.02%
Triveni Engineering and Industries
Triveni Engineering and Industries (NS:TREI) is one of the largest integrated sugar manufacturers in India. It has four well-equipped ultra-modern distilleries and produces potable alcohol as well as fuel-grade Ethanol. The company is also expanding its distillation capacity by setting up two new dual feedstock distilleries. The commercial production from the new distilleries is expected to commence in the October-December quarter, making Triveni Engineering and Industries among the best ethanol stocks to buy in 2023.
1 year = 45.28%
Dhampur Sugar Mills
Dhampur Sugar Mills (NS:DAMS) is a manufacturer of refined and raw sugar, bio-fuels, biomass-based renewable power, and other related products. It is one of the largest suppliers of fuel ethanol to OMCs across India. It adheres to the latest environmental standards for the production of fuel ethanol. Given the increasing demand from oil marketing companies, investors scouting for the best ethanol stocks to buy in 2023 may look at Dhampur Sugar Mills.
1 year = 44.1%
Globus Spirit
Globus Spirits Ltd (NS:GLOS) is an alcohol-beverage manufacturer that is also on the radar of investors looking to buy ethanol stocks. It has nearly three decades of experience and operates integrated plants to facilitate the production of rectified spirits, grain-neutral alcohol, value-priced spirits, and premium spirits. The company plans to set up a 300 klpd ethanol plant in Odisha. This makes Globus Spirit among the top ethanol stocks in 2023.
In 2021, it completed the West Bengal plant expansion from 38 million litre to 91 million litre per annum, making this facility the largest grain-based distillery in India.
1 year = 4.59%
Bajaj Hindusthan Sugar
Bajaj Hindusthan Sugar Ltd. (NS:BJHN) (BHSL) is one of India's leading sugar and ethanol manufacturing companies. Part of the Bajaj Group, it is headquartered in Mumbai (Maharashtra), India. Bajaj Hindusthan Sugar Limited is a sugar producer in India, Asia's number 1 and world's number 4 integrated sugar company, it has an aggregated sugarcane crushing capacity of 136,000 tonnes per day, and alcohol distillation capacity of 800 kilo liters per day across 14 locations in the north Indian State of Uttar Pradesh.
The company is a leader in the Asian and Indian sugar industry and is also one of the largest producers of green fuel ethanol in India. The site selected for the first plant was at Gola Gokarannath in district Lakhimpur Kheri in the Terai region of Uttar Pradesh, an area rich in sugar cane. Another sugar plant with a cane crushing capacity of 1400 TCD was set up in 1972 at Palia Kalan, a large cane-supplying centre about 70 kilometers from Gola Gokarannath.
1 year = 156.1%
In addition to the above-mentioned list of companies with the potential to capture growth opportunities from the growing ethanol market, other ethanol stocks to look out for in 2023 are:
1. Dwarikesh Sugar Industries: Its plants, with a combined capacity of 21,500 tons of sugar per day, are located in the Bijnor district of Uttar Pradesh, at Dwarikesh Nagar (Najibabad), Dwarikesh Puram (Afzalgarh) and at Dwarikesh Dham, Tehsil Faridpur, District- Bareilly.
2. Dalmia Bharat Sugar: It operates sugar mills in Ramgarh, Nigohi, Jawaharpur; Uttar Pradesh, and Sangli and Kolhapur, Maharashtra.
3. Balrampur Chini: In 1998, BCML acquired a controlling stake in the Tulsipur Sugar Company Limited, a profit-making sugar company located near Balrampur in Eastern Uttar Pradesh with an installed capacity of 2,500 tonnes of cane per day.
4. Praj Industries (NS:PRAJ): It is an Indian multinational process and project engineering company, headquartered in Pune, Maharashtra. It established a dedicated business unit in 2008 to offer critical process equipment and systems to various process industries such as Oil & Gas, Refining, Petrochemicals, Fertilizers, Chemicals, Food, Pharma, and Biotech.
But before picking up these stocks, investors must consider some factors.
Sugar industry dependency
Among the top ethanol stocks in India are the companies that operate in the sugar sector. As we all know sugar is sucrose made from sugarcane. The cultivation of sugarcane requires the availability of water in large quantities, so by extension, the outcome of the monsoon has a direct impact on the sugar industry.
In addition, the government’s policy on exports and the movement in international prices also have a direct impact on the earnings profile of sugar companies. So even if the company is benefiting from its ethanol production division, the impact on the main business of sugar manufacturers could potentially weigh on ethanol stock prices.
Before investing in ethanol stocks, see the cash flows and revenues in the main as well as the ethanol business to assess the potential risks. Investors must also look at the plans charted by the companies to ramp up ethanol production which will help in meeting the growing demand. Demand push from the government towards environmental-friendly initiatives like E20 has led to the creation of an ethanol economy. With a variety of incentives, the government is incentivizing companies to increase production. To top it, oil marketing companies are also increasing procurement of blended fuel. This has put ethanol stocks in a sweet spot. Inflation hedge
Commodities tend to do well in an inflationary environment. In the period of inflation, prices of commodities such as sugar and ethanol also rise. Hence, in addition to providing a hedge, ethanol stocks can also provide diversification benefits to the portfolios of investors.
Large institutional investors are increasingly holding their portfolio companies accountable for any harm their business may cause to the environment. The impact of climate change has grabbed the attention of governments and policymakers, who are designing environment-friendly policies. The usage of ethanol fuel has advantages over other sources of fuel because it does not pollute the environment. The release of toxins when ethanol fuel is used in vehicles is at a lower level. This helps in reducing global warming, which is caused by the emission of greenhouse gases from the use of fossil fuels such as oil, natural gas, and coal. Investing in top ethanol stocks could be your way of ensuring that the portfolio is also environmentally friendly.
Government support
With a focus on achieving net-zero carbon emissions by 2070, the government is expected to continue with initiatives like E20 that can potentially benefit companies involved in the production of ethanol. In fact, the 20% blending of ethanol with petrol was upgraded from the earlier 10%. In December, Oil Minister Hardeep Singh Puri said that the inhibition to confine to 20% will erode and the ecosystem will start and people will start talking about why not 30% or more. The statement indicates that there could be more room for ethanol manufacturers.
With OMCs preparing plans for a phased rollout, and vehicle manufacturers also pivoting towards compatible modes, there is visibility on demand, which is a positive factor for those looking to buy the best ethanol stocks in 2023.
Diversification
Typically, government policies are designed with a long-term vision. There could be short-term hurdles but in the long run, policies like E20 have great benefits. Investing in ethanol stocks could be a great way of loading the portfolio with stocks that can turn multi-bagger because of the government push. Ethanol stocks could also provide a diversification in your portfolio that could take earnings yield higher on a long-term basis.
But there are also some challenges and risks
Government policies
As discussed above, most of the top ethanol stocks are of the companies with main business in the sugar and alcohol beverage industry. Now, both these industries are heavily regulated by the government. Any impact on the revenues of the main business could also be reflected in the stock prices. Along with ethanol-blended fuel, the government is also supporting initiatives focused on electric vehicles. Now, E20 fuel is not going anywhere in the short to medium term. But from a long-term perspective, investors should consider the risk factor of falling demand for such fuel in the context of the rising acceptance of electric vehicles.
Conclusion
Efforts of the government to pursue green growth have benefited many sectors including ethanol producers. Policies like E20 are strategic in nature with multiple benefits from the point of view of economic growth. Investors must take note of this ethanol economy, which is expected to grow in leaps and bounds.
The Indian government has put a lot of thrust on green growth and on cutting dependency on oil imports. All these measures may lead to huge growth opportunities for ethanol stocks.
What kind of dividend yields do ethanol stocks offer?
Currently, the companies listed above are offering dividend yields of 05%-3.0%. Gulati in a statement said, "The Global Biofuel Alliance is a critical step towards a sustainable future as it seeks to build capacity, provide technical assistance, create a virtual marketplace, put down standard codes, sustainability principles and regulations for biofuels, to meet the growing energy needs, both in the domestic as well as global markets."
Indian Oil Corporation (NS:IOC), Bharat Petroleum Corporation Limited (NS:BPCL), and Hindustan Petroleum Corporation Limited (NS:HPCL) have a cumulative market share of over 90%
Oil marketing companies such as HPCL are also setting up ethanol plants that will facilitate the progress under the E20 plan. Besides, the auto industry has also taken the lead with the top car as well as 2-wheeler manufacturers bringing out models with ethanol-run flex engines. Companies have been given various incentives, including interest subvention, have been given to companies involved in ethanol production.