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The molasses and bagasse byproducts are set to rescue sugar mills' from their financial problems on their core operation in the coming crushing season. Accordingly, mills have plans for Rs 4,000 crore of investment in the coming year, to raise income from allied activities, such as power generation and distilleries.
At the current payable cane price of Rs 275-290 a quintal, the average cost of sugar production works out to Rs 3,300 a quintal against the current price in the benchmark spot Kolhapur market at Rs 3,000 a quintal. However, the byproducts would be converted into remunerative products such as ethanol and power.
"Byproducts are set to prove the saviour for the mills," said Abinash Verma, director-general, Indian Sugar Mills Association.
An Icra report said the prices of bagasse and molasses continue to remain remunerative, driven by healthy demand from consuming sectors such as power, paper and alcohol. Higher realisations for ethanol fuel will result in even higher returns. Further, forward integration into distilleries and power generation continues to yield healthy returns, driven mainly by a supportive regulatory framework and healthy offtake and pricing for alcohol and power.
"With the partial decontrol of sugar sales and an upward revision in ethanol prices, along with the commitment on full procurement of the green fuel for mandatory blending with petrol by the oil marketing companies (OMCs), the sentiment has changed. Fresh investment will come largely in byproducts, including ethanol and electricity generation," said Narendra Murkumbi, managing director of Shree Renuka Sugars.
A significant part of the total revenue and profits of sugar mills comes from byproducts, especially in the case of forward integrated entities. Although there are concerns pertaining to timely collections from mills selling to state-owned utilities, especially in Uttar Pradesh and Tamil Nadu, there has been an improvement in payment receipts from these utilities lately. Consequently, forward integration will remain crucial for improving profitability and riding through the cyclicality of the sugar industry, said the Icra report.
With the current bagasse output, sugar mills can generate 7,500 Mw of electricity annually against the actual current generation of 3,200 Mw. The remaining bagasse is used for manufacturing paper and press board (raw material for furniture). "Around half of sugar mills' power generation capacity is underutilised," said Verma.
A number of small units sell bagasse to larger companies in the sector and to paper manufacturers, to avoid investing in value addition. Consequently, not only do the prices of byproducts fluctuate, depending upon demand and supply; but these also create uncertainty in mills' revenue generation.
"Mills with own value addition facilities would get higher returns than those selling byproducts to others," said Verma.
Also, OMCs have offered around 25 per cent more in ethanol prices to distilleries, from Rs 27 a litre earlier to Rs 34-36 a litre now.
