Sugar prices to remain firm due to deficit situation: ICRA

Domestic sugar prices are likely to remain firm in the near term on account of the expectations of a decline in production and deficit situation in the domestic and global markets, rating agency ICRA said.
ICRA expects the domestic sugar prices to remain firm in the near term, given the deficit situation in the domestic and international markets. This, coupled with moderate cane price increase seen for the current sugar year across most states, augurs well for profitability in the near-term, ICRA said.
"With recent government estimates pegging a more than a 15 per cent decline in the sugar production for SY17 (sugar year beginning from October) compared to last year, prices are likely to remain firm over the next 2-3 quarters," ICRA Head, Corporate Ratings, Sabyasachi Majumdar said.

Further, with the crushing season drawing to a close in both Maharashtra and Karnataka and both mills reporting a lower-than-expected output, the possibility of the actual production for SY17 falling even below the government's estimates cannot be ruled out, Majumdar said.
While the sugar production in SY17 is expected to significantly fall short of what was anticipated earlier, an opening stock of 7.6 million tonnes is likely to result in the overall sugar availability between 28-29.5 million tonnes.
This is likely to be adequate to fulfil the domestic consumption of around 24.3 million tonnes (marginally revised from the earlier estimate of around 25.0 million tonne owing to short-term demonetisation impact).

This will leave closing stocks of around 4.6 million tonnes in SY17, which would be sufficient to meet the requirement for over two months of domestic consumption.

It said sugar prices have been driven mainly by the expectations of a decline in output, which has increased from around Rs 31,500 per tonnes in March 2016, to Rs 36,000 per tonnes in October 2016.
The prices showed a marginal dip following the demonetisation exercise to around Rs 35,000-35,500 per tonnes in November and December 2016, it added.
"Continued healthy realisations and healthy recovery rates are likely to result in healthy contribution margins for UP-based mills, while the mills in Maharashtra and Karnataka may see an adverse impact on volume sales arising out of lower production, partly offsetting the benefit from rising sugar prices and the relatively stable cane costs," Majumdar said.

Overall, ICRA expects efficient and forward-integrated sugar mills to report healthy profitability trends across most key producing states over the next two to three quarters. "However, an overhang of the past losses, which were largely funded by debt, will continue to weigh on net margins, capitalisation and coverage indicators of sugar mills, especially the weaker ones," he added.