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Sweeter days are in store for Indian sugar sector even though aftertaste of past losses and debt levels may linger, according to rating firm ICRA. The rating agency pegst sugar production at around 25.5 million metric tonnes (MT)during the sugar year 2016 (SY2016), a decline of 10% over the previous year.
Lower production along with exports of around 2 million MT, is likely to bring down the closing stocks to around 7.6 million MT in SY2016 from around 9.5 million MT in SY2015. The decline in sugar stocks is a positive and has resulted in an improvement in domestic sugar realizations since August 2015.
With effective cane prices(after accounting for duties and State-level subsidies) for SY2016 largely remaining unchanged over the previous year, the increase in sugar realizations is expected to improve the contribution margins for sugar in SY2016.
"These factors, together with the higher recovery rates, are expected to drive a significant improvement in profitability for sugar mills based in Uttar Pradesh (UP). Profitability improvement is likely to be moderate for mills based in Maharashtra and Karnataka, given the lower cane availability coupled with the increase in cane prices in SY2016."
This apart, profitability is also likely to be supported by improved realizations for by-products. While better profitability and stock reduction are expected to result in improved liquidity and debt coverage metrics for sugar mills in the near term, the same would continue to be weighed down by high amounts of debt outstanding and/or cane dues incurred to cover losses in the previous sugar years. While international sugar prices have recovered marginally from their record lows of September 2015, they remain at modest levels.
Although sugar mills will have to sell sugar at the modest global prices prevailing, ICRA expects export-linked subsidies for SY2016 and the resulting modest increase in domestic sugar realizations to offset the losses from export sales to a large extent.
While the government has supported sugar mills by providing interest-free loans to clear cane dues and mandating compulsory exports to tackle the high sugar stocks in the domestic market, the primary aspect of linking sugar and by-product realizations with cane costs is yet to be fully addressed, although ICRA sees a movement towards this goal, as seen in UP.