Sugar mills to show stable operating profitability on higher domestic sugar prices, rise in ethanol sales, says CRISIL
Sugar mills will show stable operating profitability on higher domestic sugar prices and increasing sales of ethanol which will subsequently help offset the rise in sugarcane cost and lower exports in fiscal 2024, according to a report by CRISIL. Domestic sugar prices have increased by about 5 per cent between March and June this year to ~Rs 34/kg after remaining flat at ~Rs 32/kg for the past two fiscals. The rise in prices is because the total production is estimated to be lower by nearly 7 per cent for the ongoing sugar season (SS 2023) due to unseasonal rains in key growing areas of Maharashtra and Karnataka.
Further, prices are expected to hold at these levels in the short term as net sugar production is expected to see only a modest increase in the next season (SS 2024) due to higher diversion for ethanol (~5 million tonnes vs 4 million tonnes in the ongoing season), it said.
The entire value chain of sugar – including procurement price of sugarcane, quantum of monthly sugar distribution and its annual export quota – as well as the prices of ethanol is regulated by the government. Not only this, even the quantum of exports is determined considering sugar production (net of diversion for ethanol), domestic consumption, and need to maintain stock for consumption during the lean season. Recently, the cabinet committee on economic affairs announced an increase in the fair and remunerative price (FRP) for sugarcane by ~3.5 per cent to Rs 315 per quintal for the next season. Ethanol prices are also expected to see a modest increase in prices in the times to come.
“Tailwinds from steadily growing ethanol volume and better realisation, supported by the government’s policy, basis which price of ethanol derived from sugarcane has been revised by ~3-4 per cent annually, will offset the impact of higher cane prices. This, together with recent improvement seen in domestic sugar realisations will keep the operating profitability of integrated sugar mills steady at 11-12 per cent in fiscal 2024,” said Poonam Upadhyay, Director, CRISIL Ratings.
Meanwhile, the report said that the operating profitability of millers that depend primarily on sale of sugar and do not have distillery plants, may get impacted as they will lose out on the recent surge in international prices of sugar which are ~55 per cent higher than the domestic prices. “This is because the sugar mills have already exhausted the export quota of 6.1 million tonnes approved for the ongoing season and there is limited possibility of further increase. To be sure, exports have already declined ~46 per cent on-year in the current season compared with SS 2022,” the report stated. This is based on an analysis of 24 sugar mills by CRISIL Ratings.
“We expect credit quality for integrated millers to remain largely ‘stable’. With cash flow generation remaining steady and working capital requirement under control, debt levels will rise only for players augmenting distillery capacity for ethanol production. Here, too, continuing interest subvention schemes to fund such loans, will largely offset the impact of higher overall interest rates, thus limiting the slide in interest cover to 6.4 times in fiscal 2024 from ~7 times last fiscal,” said Anil More, Associate Director, CRISIL Ratings.
The ratings agency said that the domestic sugar price movement, quantum of rainfall and reservoir levels, and average sugarcane yield will bear watching in the road ahead.
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