Lower domestic production estimates and a global deficit forecast are likely to keep sugar prices elevated, brightening profitability prospects of sugar mills in the short term, rating agency Icra has said in its latest report.
Union Food Minister Ram Vilas Paswan recently put the government's sugar production estimates at 22.5 milion tonnes for sugar season (SS) 2016-17, a marginal decline from 23.37 million tonnes forecast by industry body, Indian Sugar Mills Association (ISMA). Given that consumption is estimated at 23.5 million tonnes, India is likely to report a deficit year in sugar production.
"Given the deficit situation in the domestic and international markets, sugar prices are expected to remain firm in the near term. This, coupled with moderate cane prices seen for the current sugar year across most states, augurs well for profitability in the near term," the report said.
Domestic sugar prices remained firm, having increased from around Rs 31,500 per metric tonne in March this year to Rs 36,000 in August, sustaining that level in September. With the surge continuing in October, prices reached a five-year high of Rs 36,200 per metric tonne.
Prices continued to remain healthy in November, though there was a marginal dip to Rs 35,500 per metric tonne, following the demonetisation announcement.
"With recent government estimates pegging sugar production to be 10 per cent lower as compared to last year, prices are likely to remain firm over the three or four quarters. This apart, moderate cane price hikes effected in most states, notably UP, bode well for the industry profitability outlook in the short term," said Sabyasachi Majumdar, Head, Corporate Ratings, Icra.
However, Indian consumers needn't worry as the industry has sufficient stock not only to meet the domestic deficit but also for market intervention in case of any eventuality. Data compiled by ISMA showed total sugar carryover stocks at 7.7 million tonnes from SS2015-16. After meeting domestic deficit and exports, there would still be a carry over balance of 4.7 million tonnes for SS2017-18.
While the mills in Maharashtra and Karnataka are likely to benefit from the rising sugar prices and relatively stable cane costs, several mills may see an adverse impact on volume sales arising out of lower production.
On the other hand, 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 (Apr-Sep 2016), absolute levels of revenues and profits are likely to be supported by higher sales volumes, given expectations of better crushing and sustained performance on recovery rates for UP-based mills.