Profitability of sugar mills in south India to remain under pressure

Rise in cost production impacting profits

The profitability of the sugar mills located in the southern region of India, especially those in Tamil Nadu and South Karnataka, is likely to be adversely impacted in FY18 due to an increase in the cost of production.

Rating agency Icra estimates lower cane availability in the region following the past three years of continuous drought. Reduced availability of cane for crushing may raise cane costs, that is the fair and remunerative price (FRP) for sugarcane, from October onwards in 2017.

While mills in Maharashtra and North Karnataka are likely to be negatively impacted by higher costs, they are set to reap benefits arising out of higher production. As far as mills in Uttar Pradesh are concerned, they are likely to be benefitted owing to healthy sugar prices, good volumes and consistent recovery rates. However, the current momentum could break in the wake of higher cane prices. State advised price or SAP is yet to be announced and is expected to be higher on a year-on-year (YoY) basis.

“Despite an increase in sugar production, consumption is estimated to be around 24.5 million tonnes this year. Therefore, the low-closing stock levels of sugar in the domestic market are likely to support sugar prices in the near term,” said Sabyasachi Majumdar, Senior Vice President & Group Head, Icra Ratings.

According to Majumdar, while sugar prices are likely to remain firm on an overall basis, an increase in cane prices is likely to result in some moderation in margins from the third quarter of FY18. Apart from this, the overall debt levels for most players in UP have come down in the previous season in 2017 and the trend is likely to continue this season as well.

To explore solutions to problems arising out of droughts, taxes and government policies, domestic traders’ body- the All India Sugar Trade Association (AISTA)- is organising a three-day conference in Mumbai between September 1 and 3. 

Several domestic and global players, attending the AISTA Sugar Conclave 2017, will deliberate upon various issues, including government policy, global sugar supply and demand, price discovery and other factors that drive markets.