Ailing sugar mills may be up for a good news. The recent announcement by the government to hike minimum support price (MSP) could improve their operating margins in the ongoing sugar season, a report said. The margins are likely to get better by 300-400 basis points (bps) following a nearly 7 per cent MSP rise to Rs 31 per kg from Rs 29 announced by the government last Thursday, rating agency ICRA said in a report.
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“Increase in MSP would definitely reduce arrears from current highs to Rs 16,500 crore by end of SS 2019, nevertheless they will continue to stay above the average of ~Rs 9,000 crore over the last 3 sugar seasons,” said Hetal Gandhi, Director, CRISIL Research.
The move is also expected to raise incremental domestic sales realisation of nearly Rs 3,300 crore, while higher export prices will generate another nearly Rs 200 crore, the report added.
That will help sugar mills reduce their cane arrears, which stands at Rs 20,000 crore now, by approximately 18 per cent to Rs 16,500 crore, it noted. ICRA also expects that the move would help to cut the losses that millers have racked up because of excess supply and tepid exports.
Meanwhile, last Thursday, the Centre had hiked the minimum selling price (MSP) of sugar by Rs 2 per kg to Rs 31, implying the sugar mills cannot sell the sweetener below Rs 31 per kg. The move is expected to boost the liquidity of cash-strapped millers and help clear mounting cane arrears of around Rs 20,000 crore. The arrears of sugarcane farmers stood at around Rs 20,000 crore as of January-end, according to industry body ISMA.