Profitability margins of sugar firms are set to remain lower this crushing season, due to substantially higher cane price and sugar mills’ inability to pass the same on to consumers because of the government’s continuous intervention, forecasts IMaCS, a subsidiary of credit rating agency ICRA Ltd. The agency estimates sugar price to remain lower in near term on higher carry over stocks.
IMaCS, in its comment on the Indian sugar industry, says: “Profitability margins of sugar firms could continue to tend downwards because of higher cane costs and lower extent of pass-through to prices, lower world sugar prices and consequently lower export realisations, likely decline in exports during 2012-13 because of lower domestic sugar production, higher energy costs, and higher margins for refining raw sugar into refined sugar (which places downward pressure on realisations for integrated sugar mills).”
India’s sugar production is expected to decline by around 2.4-2.6 million tonnes (mt) during sugar year (SY) 2013 to around 24 mt. Taking into account the carry-over stocks of about 6.8 mt from SY2012, total availability of sugar in SY2012 is estimated at around 30.7-31 mt, the IMaCS report says. By comparison, consumption is expected to increase to 22.7-23 mt, resulting in a surplus of around 8 mt. Considering ending stocks of 6.1 mt, exports are forecast to decline from 3.5 mt in SY2012 to around 2-2.2 mt during SY2013, it said.
| LOW PROFIT MARGINS | |||
| Net Sales | |||
| Rs crore | TTM-Sept-11 | TTM-Sept-12 | %chg |
| Balrampur Chini | 2,068.46 | 2,820.01 | 36.33 |
| Bannari Amman | 1,005.55 | 1,311.21 | 30.40 |
| KCP Sugar & Ind | 360.78 | 450.39 | 24.84 |
| EID Parry | 1,478.65 | 1,793.47 | 21.29 |
| Ponni Sugar Erode | 241.76 | 266.52 | 10.24 |
| Dhampur Sugar | 1,461.76 | 1,554.88 | 6.37 |
| Shree Renuka Sugar | 4,684.80 | 4,315.60 | -7.88 |
| Bajaj Hindusthan | 4,849.09 | 4,210.65 | -13.17 |
| Source:Capitaline Compiled by BS Research Bureau | |||
The outlook for by-products such as fuel ethanol is uncertain given the expected decline in sugar production during 2012-13, and low prices for ethanol fixed by the government, the IMaCS report on sugar industry says.
Following three years of high growth when production increased at an annual rate of 22 per cent, India’s sugar production is forecast to decline around eight to nine per cent during SY2013 to 24 mt, primarily because of a decline in cane production. In addition, cane diversion towards gur production could be higher because of higher growth in gur prices vis-à-vis sugar prices, stagnant product prices, higher cane arrears, and weakening financial performance of sugar mills.
The production of sugar in India is dependent on the production and availability of sugarcane and its usage towards production of sugar, gur, and khandsari. India’s sugarcane production is forecast to decline 6.2 per cent during SY2013 because of 6.5 per cent decline in yields caused by deficient monsoon conditions at the start of the season.
In India, sugar is an essential item of mass consumption along with rice, wheat, and vegetable oils and a significant source of energy, supplying around nine per cent of the daily calorie supply.
Despite considerable fluctuations in domestic production and prices, India’s sugar consumption has increased at an annual rate of three per cent over the past decade.
Driven by the continued switching from gur to sugar, rising incomes, and growing population, India’s sugar consumption is projected to increase at a high rate of 2.5-3 per cent per annum in the medium term. Income increases and high-income elasticity of sugar, and the continued switch in demand from gur and khandsari to sugar are expected to drive consumption.
Although gur and khandsari are still the main sugar products consumed in rural areas, demand for white sugar is expected to continue to increase both in absolute and per capita terms. Moreover, the growth of sugar demand by food industries and other non-household users, estimated to account for about 60 per cent of total consumption, could provide additional impetus to longer-term market growth.
With confirmed positive production outlooks for 2012-13, world sugar prices are expected to decline in SY 2013. Prices are likely to remain under downward pressure, given prospects of a third consecutive large world production surplus. Ending stocks are forecast to increase for the third successive year during SY2013, and the build-up of stocks could dampen the downward pressure on world sugar prices.
