Bitter Pill: Sugar yield likely to fall next season over drought fears

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Published: June 26, 2019 12:22:54 AM

The domestic sugar output in SY2020 is likely to decline from 32.9 mt in SY2019, says Icra report.

sugar, sugar industryIn UP, there has been a decline in the production by 5% year-on-year to 11.4 million tonne in SY2019 due to untimely rainfall.

After a record sugar production in SY2019, the forthcoming sugar season — SY2020 — is expected to witness a marked decline, owing to drought-like conditions in Maharashtra and Karnataka. Despite the expected decline, pressure is likely to continue on sugar prices and the consequent operating margins in FY2020 given the expectation of continued sugar surplus scenario.

India’s ability to export sugar and continued policy support by the Union government to divert sugarcane production towards ethanol manufacture will remain key to health of sugar industry, rating agency Icra said on Tuesday.

Sugar production in SY2019 is likely to be higher by 2% year-on-year at around 32.9 million tonne compared to 32.2 million tonne in SY2018. This is driven by the healthy production in key sugar producing states such as Maharashtra, Uttar Pradesh and Karnataka. This sugar production is after considering the diversion of ‘B’ heavy molasses and sugarcane juice away from sugar, into ethanol.

In UP, there has been a decline in the production by 5% year-on-year to 11.4 million tonne in SY2019 due to untimely rainfall. However, it continues to remain healthy. While in Maharashtra, the production at 10.7 million tonne in SY2019 remains largely similar to that in last year. In Karnataka, it increased by 18% year-on-year to 4.3 million tonne, the Icra note pointed out.

In FY2019, the revenue of most sugar mills reported a decline due to lower sugar realisations on a year-on-year basis. While the sugar division’s profitability continues to be adversely impacted by the high cane cost of production and subdued sugar realisations in FY2019, the overall operating margins of most UP-based mills reported an improvement supported by the better distillery division’s performance. This was due to higher distillery sales volumes along with improvement in the realisations in FY2019 on a year-on-year basis.

For most UP-based mills, the improvement in operating profitability resulted in higher interest coverage in FY2019 on year-on-year basis, although the increase in the total debt owing to low-cost soft loans has resulted in deterioration of Total Debt/OPBIDTA.

Sabyasachi Majumdar, senior vice-president & group head, corporate ratings, Icra, said: “We expect domestic sugar production for SY2020 to decline from 32.9 million tonne in SY2019 owing to drought-like conditions in major sugar producing states such as Maharashtra and Karnataka. However, it is too early to ascertain on the quantum of decline in production. Icra estimates domestic sugar consumption to be around 26 million tonne in SY2019 and the closing stocks at around 14.5 million tonne.”

“While anticipation of decline in sugar production has resulted in recent increase in the sugar prices to `33-33.5 per kg (ex-mill UP), pressure on sugar prices going forward cannot be completely ruled out given that sugar surplus situation is likely to prevail on account of the significant opening stocks for the forthcoming season. With the distillery capacities of major mills coming into production for SY2020, the diversion of B-heavy molasses and sugarcane juice towards ethanol production is likely to increase, thus resulting in decline in sugar production to that extent,” he said.

The operating margins and debt coverage metrics of mills are likely to remain under pressure given the sugar surplus situation and the recent leverage the mills have undergone in the form of various soft and interest subvention loans. The government support in the form of remunerative ethanol prices, subsidies for exports and MSP for sugar are likely to continue for the forthcoming season in order to prevent the piling up of cane arrears, Majumdar added.

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