Export subsidy, rise in ethanol price to increase operating margin of sugar mills in FY21: Report

By: |
December 28, 2020 6:38 PM

The Cabinet Committee on Economic Affairs (CCEA) had recently approved an export subsidy of Rs 3,500 crore for up to 6 million tonnes (around Rs 5.8 per kg) for SS21.

Further, the report stated that the price of ethanol procured by oil marketing companies was hiked recently by 4.4-6.2 per cent to encourage supply of ethanol for blending with fuel.Further, the report stated that the price of ethanol procured by oil marketing companies was hiked recently by 4.4-6.2 per cent to encourage supply of ethanol for blending with fuel.

The export subsidy of Rs 3,500 crore, recently announced by the government for sugar season 2020-21 (SS21), stable domestic demand and rise in ethanol price are likely to increase the operating margin of sugar mills to 10.5-11.5 per cent this financial year, according to a report.

The export subsidy, announced by the government for October-September SS21, will help sustain the commodity’s exports at almost last year’s level, Crisil Ratings said in a report.

This, together with stable domestic demand, higher contribution from ethanol due to higher cane diversion for ethanol production and increased ethanol price, will lead to a 100-200 basis points (bps) increase in the operating margin of sugar mills to 10.5-11.5 per cent this fiscal, it added.

The Cabinet Committee on Economic Affairs (CCEA) had recently approved an export subsidy of Rs 3,500 crore for up to 6 million tonnes (around Rs 5.8 per kg) for SS21.

“Though lower than the Rs 10.4 per kg subsidy announced for SS20, the current subsidy, in tandem with ruling international prices will help domestic mills cover the cost of production, rendering exports viable,” Crisil Ratings Senior Director Anuj Sethi said.

Crisil expects export volumes in SS21 to be in the 5-5.5 million tonnes range, slightly below the target of 6 million tonnes, due to the smaller export window available.

Further, a bulk of exports may need to take place by April 2021 given the likelihood of resumption of sugar exports by Brazil (contributing to 30-40 per cent of global sugar production), it pointed out.

Meanwhile, the domestic consumption in SS21 is likely to sustain at last year’s level of 25.5-26 million tonnes due to higher industrial demand, which accounts for 60 per cent of the total demand, mainly driven by increased consumption of packaged foods such as biscuits, chocolates and confectionery that contribute over 30 per cent of total industrial demand and stable household demand, it said.

Demand from hotels, restaurant and cafes, however, remains tepid with consumers exercising caution with respect to dining out, it added.

Further, the report stated that the price of ethanol procured by oil marketing companies was hiked recently by 4.4-6.2 per cent to encourage supply of ethanol for blending with fuel.

Better ethanol price, applicable from December 1, will lead to higher cane diversion towards ethanol production, thereby reducing sugar production by 2 million tonnes in SS21 as against 0.8 million tonnes in SS20.

Almost stable exports and domestic consumption, together with higher diversion of cane for ethanol production, should help keep inventory levels at 10.5-11 million tonnes at close of SS21, similar to 10.7 million tonnes seen at close of SS20, Crisil said.

“Higher ethanol prices, along with stable sugar realisations and steady sale volumes are expected to drive up operating profitability for mills by 100-200 basis points in fiscal 2021, offsetting impact of higher cane prices,” Crisil Ratings Director Gautam Shahi added.

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