20% ethanol blending target preponed! Which companies stand to benefit?

The government recently preponed the 2030 deadline it had set earlier, for achieving 20% ethanol blending with petrol, by 5 years. This is an interesting move and the subsequent developments in this regard should be tracked closely. With this, India’s Ethanol Blended Petrol (EBP) Programme now stands at an important juncture.

In October 2020, the government increased the remunerative procurement rate of ethanol across sugarcane-based raw material categories for the Ethanol Supply Year (ESY) 2020-21; i.e. for the period from December 01, 2020 to November 30, 2021.

Will differentiated pricing accelerate ethanol supply?

*Actual remunerative procurement prices offered by OMCs on 5-year contracts for the supply of ethanol produced from damaged grains unfit for human consumption
Government administered prices in all other cases
(Source: ISMA, PIB)

Backdrop…

As you know, Atmanirbhar doesn’t mean restricted economic activity, it only suggests that India must reduce excess reliance on imports and expand its export competitiveness. At present, imports make up ~80% of India’s crude oil demand.

India spent USD 101 billion on oil imports in FY20. To reduce the import bill and deal with the excess agriculture produce, especially the sugarcane, blending ethanol with petrol was perceived as a feasible solution.

National Biofuel Policy 2018 is expected to help

  • Reduce import dependence
  • Attain energy security
  • Support farmer incomes
  • Increase economic activity in the rural areas
  • Create additional employment

According to the targets set initially, India was to achieve 10% ethanol blending by 2022 and 20% by 2030. Against these targets, the country achieved just 5.6% ethanol blending so far. Now going by the revised deadline of 2025, the blending ratio has to go up 3.6 times over the next 5 years.

For the current ESY, India is working with the target of 8.5% ethanol blending and 10% is to be achieved in the next ESY.

Slow progress of the policy so far can be attributed to several issues the policy encountered during the initial phases.

The government tried to incentivize ethanol production by launching an interest subvention scheme in 2018, which aimed to boost the expansion of ethanol production capacities. The Rs 5,000 crore soft-loan scheme didn’t achieve much success over the last two years.

Less than 10% of projects approved by the ministry of food progressed to the next stages. Many of them failed to obtain environmental clearances, while a few others couldn’t get their loan proposals approved by banks.  After all, balance sheets of sugar manufacturers (which can potentially set up ethanol production capacities) were stretched in most cases and many of them had huge accumulated losses.

To break this deadlock, the government adopted a two-pronged strategy. It added several other raw material categories such as damaged rice, maize etc. in the permitted list of raw materials for ethanol production.

And to address the concerns of financiers, it suggested the solution of tri-party agreements. Tri-party agreements would involve banks, ethanol supplying companies and Oil Market Companies (OMCs). The nature agreement would be such that the cash flows accruing to ethanol manufacturers from OMCs can be first used up by banks to settle their dues. It remains to be seen how much tangible success such initiatives offer.

Ethanol production needs to be ramped up quickly

India’s current ethanol production capacity is around 4.2 billion liters; according to the Indian Sugar Mills Association (ISMA). The completion of on-going projects may increase India’s production capacity to 6.15 billion liters. But to achieve the target of 20% blending by 2025, India may have to set up additional capacities of 8 billion liters.

Long term procurement policy under EBP programme and differential remunerative prices based on the raw materials used have proved effective in increasing the supply to ethanol to OMCs. To attain ease of doing business, the security deposit that ethanol suppliers have to keep with OMCs has been reduced from 5% to 1% as has the penalty on non-supplied orders.

Tenders issued by OMCs inviting Expression of Interest (EOI) for procuring ethanol have been carefully worded to ensure only domestically produced ethanol using raw materials grown domestically is procured under the EBP programme.

Ethanol supplied to OMCs under the EBP Programme has to be produced from indigenous sources only and no imported alcohol / ethanol or ethanol manufactured from imported feedstock is to be supplied to OMCs under the EBP Programme.

Connecting the dots…

The ethanol blending programme can potentially have far-reaching effects on India.

The entire ecosystem—farmers, sugar mills, standalone distilleries, EPC companies assisting the installation of new ethanol production capacities, financiers and automobile manufacturers stand to gain if the EBP programme attains its desired objectives in a timely manner.

Important disclosure: Ventura’s technical expert Mr Bharat K Gala has discussed the chart pattern of Dhampur Sugar Mills in a video posted on November 22, 2020. For your convenience we have embedded the link below. If you follow his advice, you should also mind crucial price levels he has highlighted in the video for taking appropriate action.

Please Note (read as a disclaimer): The article is for informational purpose only and anything written herein shouldn’t be construed as Ventura’s view on a sector or an event. Consult your financial advisor before investing in any stock.

You may also like to read: What’s driving the crude oil rally and will it sustain?

 

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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