The Rs 3,500 crore export subsidy recently announced by the government for the October-September sugar season 2020-21 (SS21) will help sustain the commodity’s exports at almost last year’s level. That, together with stable domestic demand, higher contribution from ethanol due to higher cane diversion for ethanol production, and increased ethanol prices, will lead to a 100-200 basis points (bps) increase in the operating margin of sugar mills to 10.5-11.5% this fiscal.

These factors will also keep inventory levels for mills almost flattish in SS21 (see table 1 in annexure), despite sugar production increasing to 30-31 million tonne from 27 million tonne in SS20.

Debt levels should remain in check, supporting credit profiles, a study of 24 Crisil-rated players indicates.

The Cabinet Committee on Economic Affairs, recently approved export subsidy of Rs 3,500 crore for up to 6 million tonne – around Rs 5.8 per kg – for SS21.

Says Anuj Sethi, Senior Director, Crisil Ratings, “Though lower than the Rs 10.4 per kg subsidy announced for SS20, the current subsidy, in tandem with ruling international prices (see chart 1), will help domestic mills cover the cost of production, rendering exports viable.”

Crisil expects export volumes in SS21 to be in the 5-5.5 million tonne range (5.7 million tonne in SS20), slightly below the target of 6 million tonne, due to the smaller export window available. Further, a bulk of exports may need to take place by April 2021 given the likelihood of resumption of sugar exports by Brazil (contributing to ~30-40% of global sugar production). In contrast, sugar exports by Indian mills last season continued until September 2020.

Domestic consumption in SS21 is likely to sustain at last year’s level of 25.5-26 million tonne due to higher industrial demand, which accounts for 60% of total demand – driven by increased consumption of packaged foods such as biscuits, chocolates and confectionery that contribute over 30% of total industrial demand – and stable household demand. Demand from the hotels, restaurant and cafes, however, remains tepid with consumers exercising caution with respect to dining out.

To encourage supplies of ethanol for blending with fuel, the prices of ethanol procured by oil marketing companies were hiked recently by 4.4-6.2% (see table 2 in annexure). Better ethanol prices, applicable from December 1, 2020, will lead to higher cane diversion towards ethanol production, thereby reducing sugar production by 2 million tonne in SS21, against 0.8 million tonne in SS20.

Almost stable exports and domestic consumption, together with higher diversion of cane for ethanol production, should help keep inventory levels at 10.5-11 million tonne at close of SS21, similar to 10.7 million tonne seen at close of SS20.

Says Gautam Shahi Director, Crisil Ratings “Higher ethanol prices, along with stable sugar realisations and steady sale volumes are expected to drive up operating profitability for mills by 100-200 bps in fiscal 2021, offsetting impact of higher cane prices.”

This will help improve interest cover for sugar mills in Crisil’s sample set to over 3 times in the current fiscal from 2.3 times in the last. Further, better cash generation and flattish inventory-linked loans will enable the gearing of sugar mills to improve to 1.1-1.2 times this fiscal against 1.3 times in fiscal 2020.

Hike in minimum support price for sugar in SS21 will be a key monitorable, as it could further support profitability of mills.