Credit rating agency ICRA expects the domestic sugar prices to remain firm in the near term, given the deficit situation in the domestic and international markets.
The agency in its report says that the moderate cane price increase seen for the current sugar year across most states, augurs well for profitability in the near-term.
"With recent Government estimates pegging a more than 15 percent decline in the sugar production for SY2017 as compared to last year, sugar prices are likely to remain firm over the next two to three quarters," said head Corporate Ratings ICRA, Sabyasachi Majumdar.
Further to this he said that with the crushing season drawing to a close in both Maharashtra and Karnataka and both mills reporting a lower-than-expected output; the possibility of the actual output for SY2017 falling even below the Government's estimates cannot be ruled out.
While the sugar production in SY2017 is expected to significantly fall short of what was anticipated earlier, an opening stock of 7.6 million MT is likely to result in the overall sugar availability between 28-29.5 million MT.
This is likely to be adequate to fulfill the domestic consumption of around 24.3 million MT (marginally revised from the earlier estimate of around 25.0 million MT owing to short-term demonetisation impact), leaving closing stocks of around 4.6 million MT in SY2017, which would be sufficient to meet the requirement for over two months of domestic consumption.
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Expectations of a decline in output have been driving domestic sugar prices, which have increased from around Rs. 31,500/MT in March 2016 to Rs. 36,000/MT in October 2016. The prices showed a marginal dip following the demonetisation exercise to around Rs. 35,000-35,500/MT in November and December 2016.
Expectations of a further fall in domestic production have led to the prices firming to Rs 36,700/MT in Jan 2017 and further to Rs 37,000/MT in February 2017.
"Continued healthy realizations and healthy recovery rates are likely to result in healthy contribution margins for UP-based mills, while the mills in Maharashtra and Karnataka may see an adverse impact on volume sales arising out of lower production, thus partly offsetting the benefit from rising sugar prices and the relatively stable cane costs," added Majumdar.
However, ICRA expects efficient and forward-integrated sugar mills to report healthy profitability trends across most key producing states over the next two to three quarters. However, an overhang of the past losses, which were largely funded by debt, will continue to weigh on net margins, capitalization and coverage indicators of sugar mills, especially the weaker ones.