Profit margins of sugar mills likely to rise by 5-6% in one year

4 MT of buffer stocks to help raise sugar prices by 8-9%, reduce inventory cost by 33%

The profit margins of sugar mills are likely to rise by 5-6 per cent in the one year starting August 2019 on expectations of an 8-9 per cent increase in the sweetener's prices due to the provision of four million tonnes (MnT) of buffer stock.

A Crisil study forecasts earnings before interest, depreciation, tax and amortization (EBIDTA) margins of sugar mills to rise by 500-600 bps (5-6 per cent) during the period between August 2019 and July 2020.
 

Faced with mounting pressure on sugar mills to clear dues of cane farmers, the government on July 24 allowed the creation of four million tonnes of buffer stock which is eventually expected to help raise sugar prices and realization.

"The creation of buffer stock is expected to help decline in inventory carrying cost by 33 per cent and  sugar prices would increase by 8-9 per cent. With no change in fair and remunerative price (FRP), margins would improve further. Thus, overall Ebitda margin of large sugar mills will improve by 5-6 per cent in 2020," said Hetal Gandhi, Director, Crisil.

The increase in EBITDA margin will include a three per cent jump due to a rise in sugar prices, a two per cent jump following lower inventory carrying cost being borne by the government and one per cent on unchanged FRP, Gandhi clarified.

Higher liquidity and profitability of mills is expected to reduce cane arrears by 13 per cent or Rs 1,670 crore from the existing Rs 15,200 crore as of July 2019. Arrears could decline further if sugar mills use their additional earnings to pay off cane farmers.

There have been instances in the recent past when some mills did not pay their cane arrears despite a sharp revival in profitability, choosing instead to divert funds towards expansion of distilleries, which has been subsidised by the government. As a result, cane arrears are expected to remain at high levels if stringent measures are not taken against those who do not pay their cane farmers.

"The direct subsidy transfer for the full four million tonnes of buffer stock will reduce a substantial part of the burden of sugar mills. Not only will it give extra cash flows to sugar mills, but also improve market sentiment. At the same time, no change in FRP will help keep cane price arrears of farmers under control," said Abinash Verma, Director General, Indian Sugar Mills Association (ISMA).

Meanwhile, Sabyasachi Majumdar, Senior Vice President & Group Head, Icra Ratings, said, "This apart, the buffer stock creation would result in some improvement in the demand-supply situation in the domestic market, in turn resulting in support to sugar prices, although the quantum of the increase cannot be ascertained at this moment. These factors could improve liquidity of sugar mills, thereby supporting the cane payments to farmers."

The domestic sugar production in SY2020 is likely to be decline by 14 per cent y-o-y to around 28.2 MT from 32.9 MT in SY2019 - driven by the lower production in the key sugar-producing states like Maharashtra and Karnataka. 

Sugar consumption is expected to increase to 26.5 MT in SY2020 and the production is likely to outstrip consumption by around 1.7 MT.