A decline in exports in sugar season 2023 (SS; 1 October 2022, to 30 September 2023), together with a 3% increase in the fair and remunerative price (FRP) of sugarcane, effectively for a 10% recovery rate, will impact the profitability of sugar mills this fiscal, says a research note.
In the report, CRISIL Ratings says, "Sugar exports are likely to decline to about 8-8.5 million tonnes (mt) in SS 2023 from an all-time high of 11.2mt last season, despite production staying stable at 39.5mt-40mt. This will be largely on account of two factors. One, higher diversion of sugar for ethanol blending at around 4.3mt in SS 2023 compared with 3.5mt in SS 2022; and two, maintaining sufficient carryover stocks of sugar for domestic consumption during the non-crushing season. For the record, carryover stocks of sugar had declined to a five-year low at the end of SS 2022."
The sugar sector in India is highly regulated, with sugar being an essential commodity. The Union government decides the quantum of exports, as well as the monthly sugar quota for domestic sales, besides determining the FRP of sugarcane.
Given that sugar exports are more remunerative than domestic sales, the rating agency expects operating profitability to shrink 50-100 basis points (bps) to about 13% for integrated players and by as much as 150-200bps to around 9% for non-integrated ones, which are primarily dependent on sugar sales.
The sector's credit outlook remains stable due to lower working capital debt following reduced inventory and only modest spend being undertaken to enhance distillery capacity for ethanol. An analysis by CRISIL Ratings of 30 sugar players, which had combined revenue of Rs37,000 crore in fiscal 2022, indicates as much.
Anuj Sethi, senior director of CRISIL Ratings says, "Integrated sugar players will be better-positioned compared with non-integrated ones despite the pressure on profitability. This is because higher ethanol volumes, an increase in ethanol realisations by 3% to 6%, and higher co-generation revenues will help integrated players partly offset the impact of higher cane prices and sluggish domestic sugar prices. It also helps as these players have continued to invest in distillery capacity for ethanol blending to meet the requirement of oil companies, given the ethanol-petrol blending target of 20% by April 2025 (blending level was about 10% in fiscal 2022)."
According to the rating agency, with sugar production in Brazil, one of the more prominent exporters, affected by rains, international sugar prices (see graph below) are ruling higher than the domestic prices of Rs31.50 to Rs32/kg. This, too, will partly compensate for the lower export volumes.
Carryover sugar stocks declined to 6.1mt, including about 2.7 months of domestic consumption at the end of SS 2022 with around 3.8 months in the previous season, following record exports. The stocks are expected to be maintained at about 6mt, equivalent to 2.5 months of consumption in SS 2023, based on rising domestic consumption and still high exports.
Anil More, associate director of CRISIL Ratings says, "Net-net, despite moderately lower operating profitability this fiscal, credit profiles of both integrated and non-integrated sugar players will be supported by lower working capital borrowings, in line with reduced carryover stocks. Also integrated players will see only limited long-term debt addition to fund distillery capacity expansion. Interest coverage of integrated and non-integrated players is expected at about 5.8 times and 1.8-1.9 times, respectively in fiscal 2023 compared with 6.8 times and 2.3 times in fiscal 2022."
That said, any adverse change in export policy, variations in the international price of sugar and increase in minimum support price of domestic sugar at Rs31/kg since SS 2019 will bear watching, the rating agency concluded.