Sugar mills' margin to remain under pressure on high production cost

Cost of production works out to Rs 33-34 a kg in North where SAP determines mills? payment outgo

Squeezed between higher cost of production and lower realization, sugar mills’ margins are likely to remain under pressure this sugar year (October 2012–September 2013).

Against the average realization of Rs 32.5 a kg throughout the year in the wake of a marginal increase in demand post March 2013, the cost of production works out to Rs 33-34 a kg in the north Indian states where state advised price (SAP) determines mills’ payment outgo.

Elsewhere, however, in non– SAP states where cane prices payable to farmers are fixed on the basis of the fair and remunerative price fixed by the Centre, the cost of production works out to Rs 30-32 a kg.

“A rise in the cost of sugar production and subsequent decline in sugar margins will result in lower operating margins for sugar mills across the country. In 2012, high cash flows from by-products had cushioned stressed margins from sugar operations. However, such support from by-products will not be sufficient in 2013. Also, margin benefits from exports that accrued to some mills in 2012 are unlikely to take place in 2013 given depressed global prices,” said an India Ratings report.

Domestic sugar mills’ overall profitability is cushioned by the high margins of its by-products (distillery and power) business. However, the support from by-product businesses is not likely to be sufficient to offset the decline in sugar profitability.

In 2012, operating profits from by-products as a percentage of total operating profits was around 70%. This effectively masked overall margins, which reduced by 3% y-o-y (based on financial data of 11 UP-based sugar mills) because of a significantly deteriorated performance in the core sugar business.

Unlike UP-based mills, operating margins for the mills based in south and west India in 2012 improved around 3% y-o-y (based on financial data of six sugar mills), attributed to benefits from sugar exports and sugar refinery businesses. Operating profits from the by-products businesses as a percentage of total operating profits was around 45%.

Meanwhile, the apex trade body the Indian Sugar Mills Association (ISMA) has revised sugar production forecast upwards by 1.25% to 24.3 million tonnes on favourable climatic conditions during sugarcane crop maturing period against its earlier estimates at 24 million tonnes. Last year, total sugar output was recorded at 26 million tonnes.