Sugar stocks have been under pressure for the last 6 months as the previous sugar cycle had seen record output of sugar. This had led to a glut of sugar in the market and a fall in prices. However, now sugar stocks are having some reasons to cheer about. While the core sugar business is still under considerable threat due to oversupply, there has been some good news on the ethanol front. The ethanol business contributed just 12% of the revenues of sugar companies in the last quarter but was responsible for 50% of their profits. This had given some hope to investors that the losses on sugar would be compensated by profits on ethanol since India has a potential for blending ethanol with petrol.

One needs to remember, that for reducing India’s dependence on imported oil, there is an urgent need to blend more of ethanol with petrol and diesel. While there are various variants for ethanol production, in India only sugar based ethanol is viable from a business point of view. Other sources like Jathropa are not exactly scalable and the yield is too small to justify a full-fledged business model. If India has to move towards lesser dependence on imported oil, then higher ethanol blending is a must. That is likely to benefit companies like Dhampur Sugars and Balrampur Chinni.