With a record production of 35.9 million (m) tons, India has now surpassed Brazil to become the largest sugar producer in the world for the marketing year October 2021 – September 2022.
Increasing sweetness for sugar stocks was government recent move to provide 100% incentive for sugar production sacrificed for producing ethanol.
Sugar exports are also on the rise which has led to a sharp spike in sugar prices. But Indian sugar prices are yet to catch up with global rates.
All these tailwinds have put the sugar sector is in a sweep spot for the medium term. This bodes well for the top sugar stocks.
Here are five sugar companies in India you should add to your watchlist. They are ranked by their sales growth and profit growth in the last five years.
#1 Ponni Sugars (Erode)
First on our list is Ponni Sugars.
Established as Erode Sugar Mills in 1984 and demerged from Ponni Sugars & Chemicals in 2001, Ponni Sugars was set up in 2001.
It is primarily engaged in the business of manufacturing sugar and has a cane crushing capacity of 3,500 tonnes of sugarcane per day (TCD) as of March 2022.
It also generates power from a cogeneration plant having a total capacity of 19 megawatts (MW).
In the past five years, Ponni Sugar's revenue has grown at a compound annual growth rate (CAGR) of 8.3%, driven by improvement in cane crushing and an increase in sales of by-products. The net profit also grew by 54.8%, driven by higher sugar prices.
In financial year 2022, the company's sugar production was the highest in the last seven years. This was on the back of good monsoons and development initiatives undertaken by the company.
Ponni Sugars has invested around ₹110 million (m) in an energy efficiency project to strengthen its crushing rate with low steam consumption.
The company funded the project entirely through internal funds retaining its debt-free status. It also enjoys a high-interest coverage ratio of 300x.
The market has reflected all this in its share price performance. The share price of Ponni Sugars has soared more than 110% since December 2021.
Ponni Sugars plans to set up a distillery cum ethanol plant with a capacity of a 45-kilo litre per day (KLPD). However, it still awaits approval from the government for the same.
Going forward, a normal monsoon, high cane availability, and its energy-efficient project are expected to drive its revenue in 2023.
#2 Dwarikesh Sugar Industries
Next on our list is Dwarikesh Sugar.
From humble beginnings in 1993 with a single plant of capacity 2,500 TCD, the company has come a long way in becoming one of the leading sugar manufacturers in India.
Dwarikesh Sugar currently has a total cane crushing capacity of 21,500 TCD as of March 2022 spread across three plants in India.
Along with sugar, the company sells power and has a cogeneration capacity of 91 MW.
It also has an ethanol plant with a distillery capacity of 130 KLPD. In the last five years, the company’s revenue has grown at a CAGR of 6.9%, driven by growth in sugar sales, power, and ethanol business.
During the same period, the net profit grew at a CAGR of 8.9%.
In financial year 2022, Dwarikesh Sugar's revenue diversification increased, with the power and alcohol business contributing close to 25% of the revenue, acting as a cushion against the cyclicality of the sugar business.
The company is also increasing its distillery capacity by 175 KLPD to increase its revenue from the ethanol business.
It follows a four-pronged approach to improve operational efficiency, control costs, reduce leverage, and increase cane development.
The return on equity (RoE) and return on capital employed (RoCE) have also improved significantly to 23.1% and 28.6% in the current fiscal when compared to the previous year.
Currently, its debt-to-equity ratio stands at 0.3x, with an interest coverage ratio of 7.9x. With its deleveraging strategy, the company plans to become debt-free soon.
Going forward, an increase in the distillery capacity is expected to drive revenue. It also stands to benefit from the government’s national biofuel policy.
#3 Triveni Engineering and Industries
Third on our list is Triveni Engineering and Industries, India's second-largest sugar manufacturer.
The company is engaged in diverse businesses through its subsidiaries, focusing mainly on sugar and engineering.
It has a 61,000 TCD of cane crushing capacity, 104 MW of power generation, and 660 KLPD of distillery capacity as of March 2022.
In the last five years, the company’s revenue has grown at a CAGR of 3.2%, owing to higher sales from its engineering, power generation, and alcohol business.
The net profit has grown at a healthy rate of 29.3%.
The company has embarked on an expansion project across all its businesses. It invested ₹800 m to expand its power transmission business.
To benefit from the government’s national biofuel policy, it is expanding its distillery capacity to 1,110 KLPD from the current levels of 660 KLPD and invested ₹4.6 billion (bn) towards it.
It also invested ₹1.3 bn in modernizing three sugar plants to improve efficiency.
Despite investing heavily towards capex, the company maintained its debt-to-equity ratio at 0.2x with an interest coverage ratio of 10.4x in 2022.
The company’s RoE and RoCE stood at 19.1% and 25.5%, respectively, at the end of the financial year 2022.
Going forward, a diversified revenue base and capacity expansion projects are expected to drive the company's revenue.
#4 E.I.D. Parry India
Next on our list is EID Parry (India).
The company has a rich history of more than 225 years, manufacturing white sugar from sugarcane.
Part of the Murugappa Group, the company is engaged in the business of manufacturing sugar and its by-products.
It has eight sugar manufacturing facilities with a total cane crushing capacity of 43,500 TCD, generates 160 MW power, and four distilleries with a capacity of 234 KLPD as of March 2022.
The company also manufactures biopesticides, of which one particular product, Azadirachtin – a neem extract, has a very high demand in developed countries.
This Chennai-based business also has a significant presence in the farm inputs business through its subsidiary, Coromandel International. And there’s more…
It has a noteworthy international presence and exports its products to over 40 countries.
EID Parry (India) has always been at the forefront of innovation and sustainability. Upgrading manufacturing processes from time to time has helped the company improve its efficiency.
This resulted in higher revenue and profits. In the last five years, its revenue and net profit have grown at a CAGR of 8.9% and 24.9%, respectively.
EID Parry (India) has laid out a large capex plan for the next two years. It plans to spend ₹5.15 bn on expanding its distillery capacity by 165 KLPD through greenfield and brownfield projects.
The capex is partly funded through internal accruals and partly through debt. Given that the company is debt free, it has scope to increase its leverage.
It is also exploring opportunities to convert its sugar, distillery, and biopesticides by-products into value-added products suitable for poultry and animal husbandry companies.
#5 Balrampur Chini Mills
Last on the list is Balrampur Chini.
Established in 1975, Balrampur Chini is one of India's largest sugar manufacturing companies.
It is also the first company to diversify into the cogeneration and distillery business in India.
Apart from sugar, its products include molasses, alcohol, ethanol, bagasse, and power.
It has a total cane crushing capacity of 77,500 TCD, 175.7 MW of cogeneration, and 1050 KLPD as of March 2022 of distillery capacity spread across ten manufacturing units, ten cogeneration units, and four distilleries, respectively.
The company has a dominant position in North India.
In the last five years, the company’s revenue has grown at a CAGR of 2.4%, driven by high price realization. The net profit also grew at a CAGR of 15.4% during the same time.
The company aims to increase the share of ethanol in revenue by 30% in the next three years.
In line with this goal, it added 490 KLPD distillery capacity, which increased the total capacity to 1,050 KLPD. It invested around ₹6 bn towards capacity expansion in the financial years 2021 and 2022.
Despite a huge investment, it managed to maintain its debt-to-equity ratio at 0.1x, with an interest coverage ratio of 20x.
The company’s RoE and RoCE for the financial year 2022 stood at 16.3% and 21.2%, respectively.
The company has consistently rewarded shareholders by way of dividends and buybacks.
Going forward, a diversified revenue mix and its focus on high-margin ethanol will drive profit growth in the medium term.
Why sugar stocks should be a part of your portfolio…
The world is on the cusp of a massive energy revolution. People are going green like never before, shifting from fossil fuels to cleaner, more sustainable sources such as ethanol.
Sugar companies are benefiting from this megatrend in a big way.
After the government established the Ethanol Blended Petrol (EBP) programme, the sugar industry became more valuable to investors.
A report by International Energy Agency (IEA) said that India is set to become the third largest market for ethanol by 2026 after US and Brazil.
This increase in demand is expected to continue for some time now. But not for too long.
As the electric vehicle (EV) industry establishes itself, the need for fuel will reduce.
However, it will take some time for the EV industry to operate in a full-fledged manner in India. Until then, ethanol is India's only way to reduce carbon emissions.
Despite having so many compelling reasons, you should be cautious about investing in top sugar stocks.
The sugar industry is cyclical in nature and is heavily dependent on climatic conditions. It is also a highly regulated industry, as sugar is an essential commodity.
If you plan to invest in sugar stocks, do thorough research about the company, its financials, fundamentals, and future prospects.
We recommend you to check out this video where Co-head of Research at Equitymaster Rahul Shah discusses how to pick the best ethanol stocks.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
