India’s ethanol stocks: Opportunities for investors

The National Biofuel Policy of 2018 was a milestone in the context of India's ethanol inventory. The policy focuses on lowering biofuel consumption in India and has set an ambitious goal of achieving 20% ethanol blending in petrol by 2025.

But how much is it helping the ethanol stocks grow? Read on to learn more about the ethanol boom and the opportunities investors have.

India sets 2025 target for 20% ethanol blending

In 2020, the Indian government advanced its target for 20% ethanol blending in petrol (also called E20) to 2025. It will take about 1,016 crore litres of ethanol to reach the 20% ethanol blending goal by 2025. It is predicted that 1,350 crore litres of ethanol will be needed overall, including for other purposes. This, by default, is expected to raise the demand for ethanol this year.

Supportive government policies accelerate growth

The government has introduced several policy measures and incentives to support rapid capacity expansion and encourage investments across the ethanol value chain:

Ethanol Blending Programme (EBP) - The EBP mandates oil marketing companies to blend ethanol with petrol, starting with E10 pan-India from April 2022 before reaching E20 by 2025. The programme provides assured off-take and remunerative prices for ethanol suppliers.

Interest Subvention Scheme - This provides subsidies on interest rates for setting up new distilleries or expanding existing ones. This improves project viability and returns on investment for ethanol producers.

GST Incentives - GST on ethanol has been reduced from 18% to 5%, improving cost competitiveness against fossil fuels.

Export Incentives - Ethanol exports qualify for incentives and tax credits under schemes like MEIS (Merchandise Exports from India Scheme), boosting producer margins.

Other incentives - Several states offer additional incentives like exemptions on electricity duties, loan subsidies, and tax holidays to attract investments in ethanol projects.

Growth drivers that are fuelling the ethanol opportunity

Several structural factors make growth in India's ethanol industry an almost inevitability over the coming decade:

Surging vehicular demand - With rapidly rising incomes and expanding middle class, India is expected to become the world's 3rd largest passenger vehicle market by 2025. More vehicles naturally translate into surging fuel demand.

Increasing awareness of biofuels - Rising environmental consciousness and sustainability goals are encouraging adoption of clean biofuels like ethanol blended petrol.

Cost economics - With current low crude prices, ethanol production is highly cost competitive compared to petrol, especially with government incentives. E20 could save forex outflow by Rs 30,000 crore annually.

Energy security - Expanding ethanol output enhances India's energy self-sufficiency and insulates from global oil supply or price shocks.

Rural economy impact - Ethanol projects create livelihoods for farmers and strengthen agricultural value chains, thus attracting political support.

Key investment opportunities

For investors, the exponential ethanol demand growth makes this sector highly attractive. Some key participants to benefit include the below:

1. Ethanol Producers

Companies involved in manufacturing ethanol from feedstocks like sugarcane juice, molasses, grains like corn, broken rice, surplus foodgrains etc. These include sugar companies diversifying into ethanol. With strong growth visibility, additional ethanol capacities can provide predictable returns.

2. Feedstock Suppliers

Companies engaged in supplying feedstock like molasses or grains for ethanol production. Rising demand will reward feedstock suppliers with volume and price stability.

3. Plant & Equipment Manufacturers

Vendors providing technologies, equipment, and EPC services for ethanol plants will see strong order inflows as production capacities ramp up. Investors can benefit from this uptick in capital expenditure.

4. Biotechnology Firms

Companies offering biotech products like enzymes or yeasts to improve efficiencies and productivity of ethanol fermentation process. Their offerings will find increased uptake.

5. Logistics & Distribution

With ethanol supply volumes growing multi-fold, logistics firms providing transportation and storage solutions for ethanol stand to gain. Investments can tap into this infrastructure growth story.

Conclusion

India's rising focus on ethanol promises to unlock a secular growth story for investors who can ride this wave early. The government's unambiguous policy direction, rapidly expanding production capacities and assured end-use demand create an enabling environment for ethanol sector investments.

Forward-looking investors would do well to consider this fast-growing green fuel sub-sector among the most promising emerging investment themes in India. Given the policy priorities and growth dynamics, ethanol stocks could deliver outsized risk-adjusted returns over the next 5-10 years. The time may be ripe now to allocate some portfolio exposure to cash in on the ethanol boom ahead.