Sugar mills' margin to remain under pressure this year

Squeezed between high production cost and lower realisation, sugar mills’ margins are likely to remain under pressure this sugar year (October-September).

Against the average realisation of Rs 32.5 a kg, the cost of production works out to Rs 33-34 a kg in north Indian states where state-advised price (SAP) determines payments to mills. In non-SAP states, where cane prices 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 production and subsequent decline in margins will result in lower operating margins for sugar mills across the country. In 2012, high cash flows from byproducts 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.

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

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

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