Sugar prices are expected to remain firm in the near term due to tight stock position following 9 percent decline in production and steady growth in consumption, rating agency ICRA said today.
"Consumption is likely to outpace domestic production due to lower sugar production in Maharashtra and Karnataka.
While this decline will be offset to some extent by increased sugar output from Uttar Pradesh, the overall production may decline by 9 percent and fall short by 2.5-2.8 million tonne from domestic consumption, which continues to grow at a steady pace of 2-3 percent annually," ICRA said in a report here.
The expected decline in the sugar production during SY17 (sugar year 2016-17) along with the drop in stocks in SY16 and the impact of global sugar deficit scenario also led to firming up of domestic prices in October 2016, ICRA Head, Corporate Ratings, Sabyasachi Majumdar said.
"Therefore, sugar prices are expected to remain firm in the near term, given the tight stock position," he added.
The sugar marketing year begins from October.
An opening stock of 7.6 million tonne for SY17 is likely to result in the overall sugar availability between 30.5-31 million tonne, which is expected to meet the domestic consumption of around 26 million tonne, the report said.
However, the closing stocks of around 4.8 million tonne in SY17 is lower than the normal sugar stock level of about 6.4 million tonne (based on requirements of three months domestic consumption) and this would be sufficient to meet demand of about two months of consumption, it said.
"Sustained healthy realisations and good recovery rates are likely to result in healthy contribution margins for Uttar Pradesh-based mills despite a Rs 25 per quintal rise in the cane price for SY17.
"With the Fair and Remunerative Price (FRP) of cane for SY17 fixed at the same level as of the previous year and sugar prices on the higher side, the profitability of mills based in Maharashtra and Karnataka is likely to improve," Majumdar said.
However, the extent of increase in absolute levels of profits could be moderated with the decline in cane availability in these regions, he maintained.
ICRA expects efficient and forward-integrated sugar mills to report healthy profitability trends across most key producing states over the next 2-3 quarters.
However, past losses, which were largely funded by debt, will continue to weigh on net margins, capitalisation and coverage indicators of mills, especially the weaker ones, the report said.
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