Pressure is likely to continue on sugar prices and the consequent operating margins in FY20
High sugar stocks continue to weigh down on the prices despite expectations of significant fall in sugar production in SY2020. After drought like conditions resulting in lower cane acreage and hence lower cane production in Maharashtra and Karnataka, the recent floods in the key sugar producing districts are expected to further lower the expected sugar production.
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 government to divert sugarcane production towards ethanol manufacture will remain key to sustaining the health of the sugar industry, said an analysis by Icra.
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In July 2019, the Cabinet Committee on Economic Affairs (CCEA) had approved creation of 4 million tonne of buffer stock for one year. The estimated maximum expenditure for the creation of buffer stock was around Rs 1,674 crore. The reimbursement under the scheme would be met on quarterly basis to sugar mills which would be directly credited into farmers’ account on behalf of mills against cane prices dues and subsequent balance, if any, would be credited to the mill’s account.
Sabyasachi Majumdar, senior vice-president & group head, Icra Ratings, said: “We expect domestic sugar production in SY2020 to decline by 14% year-on-year to around 28.2 million tonne from 32.9 million tonne in SY2019. This will be driven by the lower production in the key sugar producing states such as Maharashtra and Karnataka. In these states, the cane area has declined due to lower rainfall, resulting in lower sugar production in SY2020 on a year-on-year basis.”
According to him, in Maharashtra, the production is estimated to decline by 35% year-on-year to 7 million tonne and in Karnataka by 20% to 3.5 million tonne. The production in Uttar Pradesh is likely to remain healthy in SY2020 at 12 million tonne, largely similar to that of the previous year.
On the other hand, it is expected that sugar consumption to increase to 26.5 million tonne in SY2020 and the production is likely to outstrip consumption by around 1.7 million tonne. However, high closing stocks of around 14.5 million tonne in SY2019 would result in surplus availability in SY2020.
“The buffer stock creation would improve the demand-supply situation in the domestic market and the direct impact of the carrying cost alone would translate into a higher PBT margin by 1.5-1.8%. In addition, the industry would benefit through some hardening of the sugar prices, although the quantum of the increase cannot be ascertained. However, the operating margins and debt coverage metrics of mills are likely to remain under pressure given the surplus situation and the recent leverage the mills have undergone in the form of various soft and interest subvention loans,” Majumdar said.
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, he added.