India Ratings and Research (Ind-Ra) on Wednesday said that the one million tonne increase in buffer stock of sugar announced recently by the Cabinet Committee on Economic Affairs (CCEA) is incrementally positive but may not be enough to address the prevailing surplus situation.
The increase in buffer stock subsidy to Rs 1,674 crore from Rs 1,175 crore will help in reducing cane dues to farmers, which stood at Rs 1,520 crore on July 17 for the current season (July 2018 Rs 1,690 crore) as the subsidy will directly be credited to farmers' accounts against the cane dues of sugar mills.
However, the issue of cane arrears will continue to be a sore spot for the sector, given the structural issues in pricing, said Ind-Ra.
Further, the CCEA's decision to maintain fair and remunerative price of sugarcane at the current season's level of Rs 275 per quintal provides a breather to sugar mills by preventing an increase in raw material cost, which accounts 70 to 75 per cent of sugar production cost.
"However, the cost of production remains higher than prevailing sugar prices due to a steep increase in cane fair and remunerative price over the years without any correlation with sugar prices. Overall, Ind-Ra expects profit before tax margins of sugar companies to increase by around 50 basis points on account of reduction in inventory carrying costs due to Rs 500 crore increase in subsidy," said Ind-Ra in a statement.
The CCEA's move to increase buffer stock to 4 million tonnes from 3 million tonnes as of June comes in the wake of a record domestic sugar production of 33 million tonnes expected in sugar season 2018-19 (SS 2017-18: 32.3 million tonnes), surpassing Brazil as the largest producer for the first time in 16 years.
While sugar production is likely to fall to about 28 million tonnes on account of lower acreage and rainfall deficit, it will remain higher than the estimated domestic consumption of around 26.5 million tonnes. Besides, the high carryover stock of 14.5 million tonnes will add to the surplus, said Ind-Ra.