'Mills will be profitable despite rise in SAP for cane in UP'

While production cost will escalate due to the Uttar Pradesh government raising the state advised price (SAP) for sugarcane by Rs 25 per quintal, better sugar realisations and recovery rates are likely to keep efficient mills profitable, ICRA said in a report.
The Rs 25 per quintal increase in UP government's SAP for sugarcane for the season SY2016-17 is likely to result in an increase in the cost of production by around Rs 2,500 per tonne, rating agency ICRA said.
However, given the likelihood of healthy sugar realisations and sugar recovery rates, ICRA expects that most UP-based sugar mills, especially the efficient and integrated ones, will be able to absorb the costs and remain profitable.

"We expect sugar prices to remain steady in the next 3-4 quarters, given the domestic and global supply deficit.
Further, UP-based sugar mills are likely to continue to derive the benefit from the improved sugar recovery rates arising out of cane development activities undertaken in the past.
Thus, while the UP-based sugar mills may see some reduction in margins compared to what was seen in the previous two quarters, their margins are still likely to remain satisfactory in the near-term.

This may be especially true for efficient and forward integrated mills," ICRA Senior VP Sabyasachi Majumdar said.
Last week, the UP government announced a Rs 25 per quintal increase in SAP of sugarcane for the sugar year (SY) 2016-17 (October-September season).

The order raises the cane price for the normal varieties to Rs 305 per quintal in SY2016-17 from Rs 280 per quintal in SY2015-16, and that for the early maturing varieties to Rs 315 per quintal from Rs 290 per quintal.
For the rejected varieties, the SAP has been raised to Rs 300 per quintal from Rs 275 per quintal.
ICRA said with the new cane prices, the cost of
production for sugar is might increase by around Rs 2,500 per tonne vis-a-vis SY2015-16 and stand at around Rs 28,500-30,500 per tonne, given that the recovery rates for most UP-based sugar mills range between 5 per cent and 11 per cent.

However, ICRA expects the UP-based sugar mills to continue to report steady sugar realisations (currently at Rs 35,500 per tonne) in the near-term, given the supply deficit, both domestically and globally.
This apart, these mills are likely to continue to derive benefits from the relatively healthy recovery rates.
Margins will to come down from the levels seen in the previous two quarters (Apr-Sep 2016), but they will still be satisfactory for most efficient and forward integrated sugar mills over the next two to three quarters, ICRA pointed out.
ICRA, however, said for SY 2016-17, mills will have to pay the entire cane price upfront, unlike in SY2015-16, when they were given the flexibility of paying Rs 50 per quintal (out of the total basic SAP of Rs 280 per quintal) within a period of 90 days.

This may have some short-term liquidity impact on mills, which are financially weaker and relatively more leveraged.