Domestic Sugar production to fall 6-8% in SY2012-13: ICRA
ICRA estimates the sugar production of the domestic sugar industry to decline from 26 million MT in sugar year (SY1) 2011-12, to around 24-24.5 million MT in SY 2012-13 (a decline of around 6-8 percent), driven mainly by weak and delayed monsoon in several key growing regions.
ICRA's report on sugar sector
Region wise Maharashtra has witnessed the largest decline followed by Northern Karnataka although Uttar Pradesh (UP) is likely to witness growth in production because of higher sowing in previous seasons and more favorable weather conditions. ICRA estimates domestic consumption at around 23-23.5 million MT, thus the domestic sugar market is likely to remain close to balance and sugar stocks stable at around 5.5- 6.0million MT or 3 months domestic consumption.The domestic free sugar realisations, which had shown an upward trend between May 2012 to November 2012 (peaking at around Rs.36,000/MT2) driven mainly by significant export of sugar in SY 2011-12, which relieved pressures on domestic stocks, lower sugar releases and concerns over delayed and weak monsoons affecting sugar output in the coming season SY 2012-13, showed a softening trend since then and declined to around Rs. 32,000/MT by April 2013 mainly because of factors such as seasonal supply pressure from new production, change in release pattern from quarterly to four monthly releases and also some sale of sugar in the domestic market by shore based refiners having access to cheap raw sugar.On April 4, 2013, the GoI announced a partial decontrol of the sugar industry by removing levy obligations on sugar and abolishing the release mechanism. The abolition of the levy obligation, which ICRA estimates would have caused a financial burden to the sugar industry to the tune of Rs. 30 billion for the sugar year 2012-13, is likely to improve the profitability of the sugar mills, although the quantum of the same would depend upon the extent to which the sugar mills are able to retain this benefit, which in turn would depend upon the fundamental supply demand position. The abolition of the monthly release mechanism would also benefit sugar mills in the medium to long-term by enabling them to manage their working capital requirements better while also enabling financially stronger sugar mills to capitalize on better sugar realizations. However, in the short-term decontrol is likely to result in some temporary pressure on sugar prices as several cash strapped mills are likely to liquidate their sugar stocks in order to meet dues, including cane arrears to farmers.As far as the global supply-demand position is concerned, the sugar industry witnessed a surplus production of almost 5 million MT in SY 2011- 12 and for SY 2012-13 too, a surplus- of around 6.5 million MT- is expected driven mainly by increased production in Brazil. This has driven international sugar prices downwards- while white sugar prices have declined from over USD 600 per MT in July 2012 to USD 520 per MT in CY 2013 (year till date), raw sugar prices have declined from around USD500 per MT to around USD420 per MT in the same period. At these prices, exports are not viable from India, and given the 10 percent import duty, imports are also not competitive at current prices except in certain pockets such as West Bengal and North Eastern India.As far as the domestic free sugar price outlook is considered, given the production decline, ICRA expects a marginal increase of Rs. 1000- 2000/MT in H2 SY 2012-13 from current levels, although larger sales following decontrol by cash strapped sugar mills may exert a temporary pressure. While prices are expected to firm up with reduced supply pressures in H2 SY 2012-13, the same are likely to be tempered by competition from imports. In the medium-term, the sugar price trends will continue to be determined by the following three factors. Firstly, the domestic sugar balance. Secondly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the world’s largest producer and exporter; and finally, the Government of India’s policies regarding exports of sugar and import duties. Nonetheless, given the fundamental supply-demand position and the removal of levy obligation, the overall price realization of sugar mills is likely to improve in H2 SY 2012-13.During SY 2012-13 too there has been an across the board increases (by around Rs. 40-50/qtl) in cane prices and inspite of increase in realizations ICRA estimates that cane cost increases are likely to outstrip realization growth in SY 2012-13 in most regions and thus create some pressure on conversion margins. However, UP and TN are likely to see a reverse trend given expectations of improved recovery rates.Prices of by-products such as bagasse and molasses continue to remain remunerative driven by healthy demand from consuming sectors such as power, paper and alcohol. Higher realizations for fuel ethanol in the current financial year will further result in improved returns from by products. Further, forward integration into distilleries and power generation continues to yield healthy returns, driven mainly by supporting regulatory framework and healthy offtake and pricing for alcohol and power. ICRA observes that a very significant part of the total revenue and profits of sugar mills comes from by-products, especially in the case of forward integrated entities. Although there are concerns pertaining to timely collections from sugar mills selling to state owned utilities especially in the states of UP and Tamil Nadu, ICRA notes that lately there has been an improvement in the payment receipt from these utilities. ICRA believes that forward integration will remain crucial for improving profitability and riding through the cyclicality of the sugar industry.As far as financial performance for SY 2012-13 is concerned, the operating profits for most mills have improved in Q1 SY 2012-13 by higher volumes and improved realizations. ICRA expects some decline in profitability performance for sugar mills in Q2 SY 2012-13 (quarter ended March 31, 2013) as compared to Q1 SY 2012-13 given decline in prices coupled with the fact that sales for the quarter would be made out of relatively higher stocks produced during the current SY. For SY 2012-13 as a whole, while sugar mills are likely to benefit from steady sugar and by product realizations and abolition of levy obligations, growth in cane prices will impact profitability of sugar mills adversely. While margins are likely to improve for UP and TN based mills given higher volumes and improved recoveries, in Karnataka and Maharashtra reduced crushing will also impact profits for most mills.As far as the medium to long-term outlook is considered, as in the past, the long-term prices and profitability of Indian sugar companies would remain highly cyclical and dependent on domestic and international supply-demand trends. The latter in turn would depend on agroclimatic conditions in major producing countries and crude oil price trends, which determine the diversion of cane crop to ethanol. Consequently, the price trends in international markets would be the key determinants of future profitability.Further, government/court action in ensuring a decontrol of the sugar industry and a rational linkage between cane prices and sugar prices will also be a key to long-term viability of sugar operations, especially in states governed by SAP. Within the sugar industry, however players who enjoy the benefit of high operating efficiencies, forward integration and a strong capital structure will be best placed to ride out the cycles.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
