Sugar turning sour for mills: CRISIL Research
CRISIL Research, India's largest independent and integrated research house, expects the Indian sugar industry's net losses to increase to over Rs.10 billion in Sugar Season (SS) 2012-13 (October to September) due to the widening gap between sugarcane and sugar prices.
June 13, 2013 / 18:15 IST
CRISIL Research's report on Indian sugar industry
Sugar mills to post heavy losses in 2012-13 season
Sugar mills in India are likely to post net losses of over Rs. 10 billion in 2012-13 sugar season (October to September) because of the widening gap between the sugarcane and sugar prices. While sugar distribution has been decontrolled with effect from April 2013 following the abolishment of the regulated releases mechanism and levy sugar obligation, cane prices continue to be regulated by the central and state governments.Over the last few years, the increase in sugar prices has not kept pace with the increase in cane prices. While average sugarcane prices paid by mills increased at 14 per cent CAGR over the last three seasons from 2010-11 to 2012-13, the increase in sugar prices has been a mere 2.6 per cent. The steep rise in sugarcane procurement costs (accounting for about 70 per cent of total operating costs) vis-à-vis sugar prices has significantly impacted the profitability of sugar mills during this period.To illustrate, in the last three seasons ending SS 2012-13, the ratio of sugarcane costs to revenues from the sale of sugar and its by-products has been as high as 76-79 per cent as compared with the previous decadal average of 67 per cent. Increasing cane costs have pushed several mills to report net losses during this period.Debt servicing ability of the industry to weaken
CRISIL Research analysed the financial performance of 74 companies which account for about 50 per cent of domestic sugar production. About 40 per cent of these companies posted net losses in SS 2011-12. Only large mills that have integrated forwards into power generation and distillery business have been relatively resilient to the pressures on profitability. Nearly 75 per cent of the companies – up from 45 per cent in SS 2009-10 – had interest cover of less than 2 times.Minimum support price announced for SS 2013-14 to add to mills' woes
For the SS 2013-14, the central government has announced a 23.5 per cent hike in the minimum price payable for sugarcane through the Fair and Remunerative Price (F&RP) mechanism. However, the increase in market prices of sugar is likely to be limited to 8-9 per cent. With the world sugar prices expected to be under pressure because of surplus production and Indian import duty on sugar as low as 10 per cent, any further increase in domestic prices would trigger cheaper sugar imports. CRISIL Research believes that this mismatch between cane and sugar prices would erode the operating margins of sugar mills by 200-250 bps. Sugar mills in Uttar Pradesh and Tamil Nadu, where the State Advised Price (SAP) for sugarcane is higher than the F&RP, would be more adversely impacted, compared with their counterparts in other states that adhere to F&RP.Disclaimer: CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information
obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or
completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report.
This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial
liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does
not have access to information obtained by CRISIL's Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in
their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of
CRISIL's Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval. 
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