Large stocks, global glut may weigh on sugar prices

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SummaryAmple availability of domestic sugar as well as a glut in global sugar inventory is likely to bring Indian sugar prices down in 2013.

Ample availability of domestic sugar as well as a glut in global sugar inventory is likely to bring Indian sugar prices down in 2013. As a result, operating margins at Indian sugar companies are likely to fall below 2012 levels (13%), said India Ratings. The ratings company has a negative outlook on Indian sugar companies for 2013, considering the continued

deterioration in their financial profile.

Financial leverage (debt/Ebitda: 4.8x in 2012, 3.9x in 2011), based on financial data of 18 listed sugar companies, is expected to worsen as sugar margins (October 2012-September 2013) may fall to R1/kg or lower (FY12: R1-2/kg).

It is believed that the floor for domestic sugar prices (assuming the current regulations and tariffs continue) will be R30-32/kg in 2013. However, the prevailing prices may be somewhat higher than this range given the higher domestic cost of production. The cost of sugar production in 2013 will be higher than in 2012, as sugarcane price has increased 16-17% over the last season. Also, particularly for mills based in Karnataka and Maharashtra, a decline in sugarcane availability due to unfavourable climatic conditions would result in lower capacity use and, therefore, lower fixed cost absorption in 2013 than in the previous year, India Ratings said.

Unlike in 2012, the expected decline in operating margins of sugar companies in 2013 will be too steep to be adequately cushioned by margins in their byproducts' (distillery and power) business. In 2012, operating profits from byproducts as a percentage of total operating profits were around 70%. This effectively masked overall margins, which contracted by 3% (based on financial data of 11 UP-based sugar mills) because of the significantly poor performance of the core business.

Unlike UP-based mills, operating margins for mills based in South and West India improved around 3% y-o-y in 2012 (based on financial data of six sugar mills), which is attributable to benefits from sugar exports and sugar refinery businesses. Operating profits from byproducts' businesses as a percentage of total operating profits were around 45% in 2012.

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