Authors: Ms. Khushbu Lakhotia, Senior Analyst, Corporate Ratings, India Ratings and Research (Fitch Group) & Mr. Jinesh Rajpara, Analyst, India Ratings and Research (Fitch Group)
The recent hike by Rs. 2 per kilogram (kg) in the minimum selling price (MSP) of sugar to Rs.31 per kg could generate an additional income of Rs.30-35 billion for sugar producers in sugar season (SS) 2018-19, and narrow the gap between domestic prices and production cost. The new ex-mill MSP of Rs.31 per kg would also help sugar producers to reduce cane arrears, which had surged to Rs.200 billion in January 2019. However, the sector outlook remains negative for non-integrated sugar companies on account of the high carry-over stock from the last season, surplus production in the current season, and weak international prices. Integrated sugar companies with alternative revenues streams from ethanol and power would be better placed.
The aggregate EBITDA margin of listed sugar companies increased to 5.1% in 3QFY19 (2QFY19: 4.2%), with revenue growth of 18% qoq, due to the commencement of crushing and an increase in allocated monthly sales. However, the margins were around 200bps-250bps lower than the EBITDA margins recorded in 3QFY18 because of lower realisations. The interest coverage ratio improved to 1.2x in 3QFY19 (2QFY19: 0.7x, 3QFY18: 1.4x).
The MSP hike should push up the domestic wholesale prices to around Rs.33-Rs.34 per kg from the level of Rs.31-Rs.32 per kg that has been prevailing since November 2018. Consequently, the EBITDA margins of the sugar segment could improve by 400bps-500bps. While the MSP remains below the cost of production of around Rs.34 per kg for Uttar Pradesh and Rs.33 per kg for Maharashtra, realisations from allied segments such as distillery and cogen will continue to be the key profit drivers for integrated sugar mills. However, working capital requirements could increase as stocks build up on account of regulated domestic sales, leading to a rise in interest costs.
India has been able to export only 0.9 million tonnes (mt) till end-December 2018 and has contracted to export another 1mt against the mandated quantity of 5mt for the season. The international sugar market is likely to face a marginal deficit of around 1.0mt-1.5mt this season due to lower sugar production in Brazil, India and the EU. Therefore, international prices are likely to stay at current levels or inch up marginally. However export for SS 2018-19 is likely to significantly fall short of the quota of 5mt.
India had produced 18.5mt of sugar till the end of January 2019, 8% more than the corresponding production in SS 2017-18, as the mills had started crushing earlier this season. However, sugar production is likely to decline to around 30mt in SS 2018-19 from the record high of 32.3mt in SS 2017-18 due to deficient rainfall, white grub and red rot infestations in Uttar Pradesh and Maharashtra. Despite being lower than the last season, production in SS 2018-19 is likely to exceed sugar demand of around 26mt. With a high opening stock of 10.7mt (2017-18: 3.9mt), India is likely to end the season with a stock of around 11mt (including a buffer stock of 3mt) compared to the normative carry forward requirement of 4-4.5mt.