Profitability of sugar mills to remain better this year: ICRA

The domestic sugar production at around 25.2 million metric tonnes during the sugar year 2016

Profitability trend for domestic sugar mills is likely to be better during the crushing season 2015-16 on supply correction, said a recent study by the rating firm ICRA.

ICRA estimates domestic sugar production at around 25.2 million metric tonnes during the sugar year 2016 (SY2016), a decline of 11% over the previous year. Lower production along with exports of around 1.6 million tonnes is likely to bring down the closing stocks to around 7.6 million tonnes in SY2016 from around 9.5 million tonnes in SY2015.

While it is too early to estimate the sugar production for SY2017 season, based on the cane plantation and monsoon levels, the rating firm expects sugar production to decline further between 4-8% to the 23-24 million tonnes range during SY2017.

"We estimate better year-on-year profitability trends ahead for most sugar mills for the next 2-3 quarters driven mainly by improving sugar price trends seen since August 2015 and stock correction. However, the absolute profit levels and net margins would continue to be weighed down by high amounts of debt outstanding and/or cane dues incurred to cover losses in the previous sugar years," said Sabyasachi Majumdar, senior vice-president, ICRA.

The extent of profitability improvement is going to vary substantially across mills, not only from state to state, but also across mills within the same state depending upon operating and financial parameters such as sugar recovery rate, control over operating expenses, extent of forward integration into cogeneration and distilleries and control over interest expenses by appropriate leveraging, he added.

Meanwhile, the stock correction has also resulted in an improvement in sugar prices, have been on a rising trend since August 2015. This trend was driven by a number of factors which included: first, a government notification on mandatory exports in month of September 2015 followed by announcement of cane production subsidy in December 2015; market anticipation of supply correction driven by drought conditions in certain key growing region; and impact of global sugar deficit scenario. Thus, the prices climbed to close to Rs 34,000 a tonne level by May 2016, an almost 50% high over July 2015 lows.

"Given the supply correction which has happened in SY2016 and given the expectations of further production decline, sugar prices would remain steady in the near term. In the next 2-3 quarters, any further increase from current levels would depend upon the following factors: (i) expectations for sugar production during SY 2017; and (ii) sugar mills own actions on supplies depending upon their inventory holding capacity. On the other hand any government actions on price controls; or any significant reduction in import duties could dampen prices," said Majumdar.

With renewed focus on the ethanol blending programme and mandatory ethanol blending been revised from 5 to 10%, the new fixed pricing mechanism for ethanol supplied to oil marketing companies (OMCs) and removal of central excise duty is expected to augur well for the profitability of the industry as a whole through higher realizations for ethanol.

As far as financial performance of mills is concerned, revenues of most sugar mills increased in FY2016 on a y-o-y basis on account of higher sugar and by-product sales vis-a-vis FY15. The operating margins of most Uttar Pradesh-based mills, although still moderate, were on the higher side during FY16 on a y-o-y basis because of the increase in sugar realisations, improvement in recovery rates during Q3 FY16 and Q4 FY16, and higher inventory valuation as on March 31, 2016.