Deficit scenario in the domestic as well as the international markets is likely to keep sugar prices firm in the near term, ICRA said.
"With government estimates pegging sugar production at 10 per cent lower compared to last year, sugar prices are likely to remain firm over three to four quarters. This apart, cane price hikes effected in most states, notably Uttar Pradesh, bode well for industry profitability outlook in short term," ICRA Head, Corporate Ratings, Sabyasachi Majumdar said.
This, coupled with the moderate cane prices seen for the current sugar year (SY), beginning October 1, across most states, will bring in positive profitability for sugar mills in the near-term.
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.
Domestic sugar prices have remained firm, having increased from around Rs 31,500 per tonne in March 2016 to Rs 36,000 per tonne in August 2016, the rating agency said.
After remaining stable at Rs 36,000 per tonne in September, the surge in prices continued in October with prices reaching their highest level of Rs 36,200 per tonne in the last five years, it added.
The prices continued to remain healthy in November at Rs 35,500 per tonne, with a marginal dip following the demonetisation announcement, it added.
While the mills in Maharashtra and Karnataka are might benefit from the rising sugar prices and the relatively stable cane costs, several mills may see an adverse impact on volume sales rising out of lower production, ICRA said.
On the other hand, it said, while a moderate increase in cane pricing for UP-based sugar mills is expected to lead to a marginal dip in profitability from the levels seen in the previous two quarters (April-September), absolute levels of revenues and profits are likely to be supported by higher sales volumes, given the expectations of better crushing and sustained performance on recovery rates for UP-based mills.
Further, Majumdar said, While the UP government has increased the state advised price (SAP) to Rs 305 per quintal during SY2017 for normal variety, the rise has been moderate, especially after keeping the SAP constant for three years.
"High recovery rates, driven by cane developmental activities by the mills in the recent past, together with prevailing healthy sugar prices, are expected to enable the mills to absorb the impact of the increased SAP, and also maintain reasonable profitability," he added.
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