Profits of sugar manufacturers are likely to remain under pressure in the March-June quarter due to the losses incurred from their core activity. Sugar mills have incurred a loss of Rs 2-2.50 per kg due to the government’s control over pricing. As against an average cost of production at Rs 28.50 a kg, mills were forced to sell sugar at Rs 26.50 a kg.
Things worsened with the extension of the season, when a couple of dozen mills in Maharashtra continued crushing until the second week of May, thereby creating a situation of oversupply. During the June quarter, most mills close their operation across the country, because there is no sugar production.
However, the refineries continue operating with imported raw sugar. As a result, in the first quarter, sugar mills are faced with high cost of employment and stock maintenance, whereas there is no tangible output.
This quarter will be no different in terms of keeping the costs high. However, selling of sugar at a loss will magnify the problems. Revenues from sugar production account for 90 per cent of the sector’s turnover. Offsetting the loss from other activities, including molasses exports may help marginally. Sugar mills have exported nearly 500,000 tonnes of molasses this quarter.
Companies like Bajaj Hindusthan, Simbhaoli Sugars, Shree Dwarikesh Sugar and Dhampur Sugar, which are dependent on cane crushing from domestic sources, are likely to be hit by the oversupply and lower realisations.
On the other hand, bigger firms, which are into the refining business, will perform much better. Broking firm Edelweiss Securities forecasted in its recent report that companies like EID Parry and Shree Renuka Sugars may compensate the loss from domestic cane crushing through refining activity, as they had hedged their raw material risk when prices were ruling lower.
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According to the report, EID Parry’s revenue may rise 14.38 per cent y-o-y to Rs 2,156.6 crore, owing to better margins from conversion of raw sugar into refined (popularly known as white premium) this quarter. But, the management guidance for production volume of sugar and by-products for this year from standalone operations and subsidiaries would be a key supporting factor.
Renuka Sugars may see a 17.7 per cent growth in revenues on account of lower cane prices. The company had already signed long-term contract for raw sugar exports from its Brazil operation at 22 cents/pound this quarter, as against 17 cents per pound in the same quarter of the previous year. Renuka’s Ebitda margin is set to expand on account of lower cane prices, coupled with higher sugar realisation. Q-o-q margins are likely to expand on commencement of the sugar season in Brazil.
These companies with strong refinery operations will be able to offset the losses incurred in crushing operations. Earnings from crushing operation will improve only in the latter half of the year. According to a report by Aditya Birla Money, Balrampur Chini Mills will recover the first two quarter losses from sugar crushing in the fourth quarter, due to an expected rise in sugar prices in the coming months.