Sugar mill operating margins seen up 300-400 bps in 2018-19: report
Commodity Online | February 19 2019
UPDATED 14:38:36 IST

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Operating margins of sugar millers could improve by 300-400 basis points (bps) in sugar season 2019 (Oct 2018- Sep 2019) following a ~7% increase in the minimum support price to Rs 31 per kg from Rs 29 announced by the government, rating agency CRISIL research said in its latest report.

“This will lead to incremental domestic sales realisation of ~Rs 3,300 crore, while higher export prices will generate another ~Rs 200 crore. That will help sugar mills reduce their cane arrears, which stands at Rs 20,000 crore now, by ~18% to ~Rs 16,500 crore. It will also cut the losses that millers have racked up because of excess supply and tepid exports,” the agency noted.

Raw material cost as a proportion of sugar sales increased to about 90% in the current season following an uptick in the Fair and Remunerative Price (FRP) of sugarcane, and subdued sugar prices owing to oversupply both locally and globally. Though the government took steps to arrest the losses of millers, non-integrated units continued to bleed in this season, the report said.

“Higher minimum support price (MSP) would mean non-integrated millers could break even or report low single-digit operating margins of 2-5% this season compared with 1-2% in SS 2018, while integrated players could see that number up 13-15% compared with 9-12%. Integrated sugar millers will also continue to benefit by fast-tracking ethanol manufacturing,” a senior official of Crisil Ratings said.

Globally, sugar production is expected to decline nearly 5% to 185 million tonne. That should support a gradual clearing of inventories and bolster prices in SS 2019. The recent, but modest, improvement in global prices, which will support exports from India, is evidence of that. Better realisations and profitability will also ease stretched working capital requirements and cane arrears of millers in the near term.

“Increase in MSP would definitely reduce arrears from current highs to Rs 16,500 crore by end of SS 2019, nevertheless they will continue to stay above the average of ~Rs 9,000 crore over the last 3 sugar seasons,” the official said.

The credit profiles of sugar mills have moderated compared with last fiscal because of continued losses at the operations level, increasing capital expenditure intensity because of investments planned in distilleries, and stretched working capital requirements. This is also reflected in the sugar sector’s credit ratio (or rating upgrades to downgrades) of 0.3 time in the first 9 months of fiscal 2019.

With expected increase in profitability and cash generation, liquidity and debt metrics of millers are likely to improve in fiscal 2020. For instance, the debt to EBITDA ratio of CRISIL-rated sugar mills is expected to marginally improve to about 4-4.5 times in fiscal 2020 compared with the estimate of ~5 times for fiscal 2019, the report said.

 

Commodity Arrivals Rate
Mustard Oil 200 9000.00
Coconut Oil 0.1 17100.00
Arecanut 5 2400.00
Sugar 397 3225.00

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