The domestic sugar sector has been going through a situation of excess supply which has negatively impacted their prospects. To support the industry, the Government of India (GoI) has announced key measures, such as creation of 3 million tonnes of buffer stock and fixing of minimum selling price (MSP) for sugar at Rs. 29,000/tonne. These are likely to improve the financial performance of the sugar mills from the current levels and support them in clearing the sugarcane dues to farmers. However, this would provide some respite only in the near term and, cane price rationalisation remains key for the long-term sustainability of the industry.
Says Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ltd, “According to ICRA estimates, the domestic market would have around 3.0 – 3.5 million tonnes of excess sugar stocks than the normative sugar stock for the next season, even after assuming exports of 2 million tonnes of sugar, which itself looks unlikely. The creation of 3 million tonnes buffer stock is likely to benefit the sugar industry by improving the supply-demand position. The direct impact of the carrying cost alone would amount to a benefit of around Rs. 400-450/tonne of sugar, translating into a higher PBT margin by 1%-1.5%. In addition, the industry would benefit by some hardening of the sugar prices, and the prices have already seen a significant recovery to Rs. 33,000/tonnes.”
For SY2018, ICRA anticipates the domestic sugar production to increase by around 55% Y-o-Y to reach 31.5 million tonnes, driven by higher-than-expected sugar production in Maharashtra, Uttar Pradesh (UP) and Karnataka. This is likely to be at least 6.5 million tonnes higher than its estimated consumption of 25.0 million tonnes. While the Government has announced a Minimum Indicative Export Quota (MIEQ) of 2 million tonnes, exports are yet to start in a full-fledged way, given subdued international sugar prices. The resultant oversupply scenario in the domestic market has resulted in a crash in the sugar prices to Rs. 27,000/tonnes in May 2018 and the cane arrears crossed Rs. 20,000 crore. Consequently, in June 2018 the Government has announced the support measures for the industry to support the sugar mills in clearing the sugarcane dues to farmers.
“The MSP of sugar at Rs. 29/kg is a positive for the mills in the western and southern region as the prices were hovering between Rs. 26 – 27/kg. This move is likely to result in an increase in the profitability of these mills from the current levels.”
“Notwithstanding the Government support measures, the operating environment for sugar mills in the short term will be challenging, given the quantum of oversupplies and also given ICRA’s expectations of the likelihood of high production in SY2019 too.” Majumdar added.