Today Sugar stocks had a dream run in the market on the news that the UP government might ask the centre to give out interest free loan and ethanol blending to become mandatory from October 2008.

SP Tulsian of Sptulsian.com said that there are two news driving the sugar companies stock. One is definitely the ethanol blending which says that 5% would be made mandatory immediately because right now about 15 states are only following the 5% blending norm which is optional which is proposed to be made mandatory from immediate effect. Second suggestion is that from October 2007 it will be increase to 10% but again optional and from October 2008 it will be made 10% mandatory. This is on the ethanol-blending front.

The second point which he see as a sweetener for the announcement which is likely to come from the group of ministers meeting is that price of Rs 21.50 has been fixed for ethanol for the next three years because if you give a clear cut pricing policy to the industry, one could take up the capex plan and one could plan out the whole of manufacturing plans, how it will pan out. These are two very strong features. Let me just give you the resultant effect of this.

If you take 5% as the blending, your requirement would be about 80 crore litre of ethanol per year. But since he said only 15 states are following this policy of blending, probably the demand from this blending is about 50-60 crore litre. Suppose if you make it 10% which is mandatory from October 2008 that would be having a demand of about 160 crore litre. So what we are effectively having is an additional demand of about 90-100 crore litre. Since the price is about Rs 21.50 per litre, here the processing cost is very low. You can effectively use your entire molasses. That will give you an incremental profit of Rs 20 per litre.

So what sugar sector will ultimately be getting is additional 2000 crore as profit before tax to their financials which is quite a good amount for giving a boost to the sector.

He further said that the news that the UP government might ask the centre to give out interest free loan is more a political move now. New government has come in UP and now you need some excuses, if you want to withdraw your support at the later date that you have not given me the support or assistance, interest free loan or grant on this account. Definitely, there are cane arrears, which are developed to the extent of about 2,000 crore plus of which about 1,500 crore plus is of private sugar mills. So what the UP government has asked for is an interest free loan from the central government of 2,000 crore which will ultimately be utilise by those beneficiaries or the recipients, for clearing the cane arrears dues to the farmers which otherwise will have a snowballing effect making the problems on the political front also.
He do not think that’s anyway improving the profitability or increasing the bottomline, giving any rationale move on part of the government, ultimately for the larger interest of the sector or for the industry, except for saving the skin or definitely clearing the sugarcane arrears dues, which is a very critical issue.

When asked about who stands to benefit the most from ethanol blending he said that the UP mills - those who have set up the distillery, they otherwise are also having the advantage of supplying. But what is happening now is they are not getting the full allocation because the surplus, now you have a production of about 300 crore litre which is about 100 crore litre for quotable and about 80 crore for industrial use. So still you are surplus with about 100-120 crore litre against the doping demand of 50-60 crore litre.

What is happening is the surplus molasses is not getting processed and that’s getting sold at Rs 250-500 per tonne which otherwise can have an effective realisation of Rs 4,000-4,500 per tonne. The sugar mills, which are not having their own distillery, definitely will stand to gain with this announcement or with this policy changes. But those who are already having their distillery are not going to affect so much, will not be benefited so much, except right now they may be having a cash outgo of about Rs 1 per litre or Rs 1.50 per litre in grabbing the contract for supply of ethanol to the oil marketing companies.

With reference to the current news on sugar companies he suggested that this is the time to book profits because you do not have any trigger or any announcements, which are expected on account of fertiliser front. May be the policy announcement will come but probably that will take a little longer time.