Profitability of integrated sugar mills is likely to go up by 75-100 basis points (bps) this financial year due to high exports for the second consecutive season and increased supplies of ethanol for blending with petrol, according to a report.
High exports for the second sugar season (October -September) in a row, coupled with increased supplies of ethanol for blending with petrol will improve the operating profitability of integrated sugar mills by 75-100 bps to 13-14 per cent this fiscal, according to a Crisil Ratings report.
Also, the recent announcement by the government to advance the ethanol-petrol blending target of 20 per cent by two years to 2023, could help sustain this momentum over the medium term, it added.
Additionally, sugar closing stocks are expected to decline to their lowest levels in the past four sugar seasons (SS) to 9-9.5 million tonnes in SS 2020-21, resulting in lower working capital borrowings.
The improvement in profitability and controlled debt levels will, in turn, bolster the credit profiles of integrated mills this fiscal, the report noted.
The credit outlook on non-integrated ones, at the other end, will remain largely stable, it added.
"The improvement in profitability of integrated sugar mills will be supported by higher sugar exports, with remunerative prices and increasing proportion of more profitable ethanol, which will offset impact of lower profitability in domestic sugar sales, and subdued returns from co-generation of power," Crisil Ratings Senior Director Anuj Sethi said.
Further, the global white sugar prices, which are currently higher than domestic sugar prices increased by 14.3 per cent over last six months to Rs 33.6 per kg (excluding export incentives) in June 2021 and are likely to remain firm given continuing supply deficit this season, caused by lower contribution from Brazil and Thailand - the two leading sugar exporters, it stated.
This will help domestic mills meet, and perhaps exceed their export target of 6 million tonne by the end of SS 2020-21, therefore, the recent reduction in export subsidy by Rs2 per kg from Rs 5.9 per kg, announced earlier, will not materially impact the profitability of sugar exports as 90-95 per cent of shipments were already contracted before the cut, it noted.
However, operating profitability from domestic sugar sales (65 per cent of sector revenue) will be moderately impacted due to a 4 per cent increase in fair and remunerative price (FRP) for sugarcane, while there has been no upward revision in the minimum support price for sugar, which remained at Rs 31 per kg.
Non-integrated players will be more impacted compared with integrated players as they don't have more profitable ethanol sales, the report said.
Meanwhile, the report further noted that the inventory levels for the industry should improve despite similar sugar production of about 30 million tonnes next season.
This is assuming healthy exports and higher supplies of ethanol for blending with petrol resulting in lower working capital borrowings, it said.
About 2 million tonne sugar production is expected to be diverted for the manufacture of ethanol in the current SS and 3-3.5 million tonnes in the next SS, it added.