With the sugar output likely to set a new record in sugar year 2018 (SY2018), mills are likely to face pressure on prices and their profitability in the near term, says a report.
Rating agency Icra has revised the domestic sugar production for SY2018 to around 29.5 million tonne, a growth of over 40 per cent, driven by higher-than-expected production in Maharashtra, Uttar Pradesh and Karnataka.
Hence, as against consumption of 25 million tonne, the production would be higher by around 4.5 million tonne than the estimated consumption, according to the agency.
Icra Ratings senior vice president and group head Sabyasachi Majumdar said the closing stocks are expected to increase to around 8.59 million tonne in SY2018.
"This upward revision in the sugar production estimate along with the liquidation of sugar stocks, especially by several cash-strapped sugar mills, post March 2018, is likely to result in pressure on sugar prices from the coming quarter," he added.
The sugar prices, after hitting a low of Rs 31,500 per tonne in February, picked up in the following weeks, post government initiatives such as the doubling of import duty to 100 per cent and the imposition of limits on sugar sales by sugar mills.
The prices, which increased to Rs 34,500-35,000 per tonne in the third week of February, again softened and are currently hovering at around Rs 32,500 per tonne.
According to Majumdar, sugar mills' profitability may come under stress on account of the higher cost of production along with the likely pressure on sugar realisations during first quarter of FY19.
However, since most major UP-based mills have seen significant deleveraging over the last couple of years, he feels this will help them withstand cyclical downturns better.
"Given the increase in production levels, the fall in prices could lead to an increase in the cane arrears. Government support will be critical for the sugar industry in the near term," said Majumdar.
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