The credit risk profiles of sugar manufacturers are likely to improve over the medium term with sugar prices expected to remain firm over the current and next sugar seasons (October 1 to September 30). The resultant higher profit and cash accrual are expected to be used by manufacturers to either reduce debt or invest in the relatively more stable ancillary business of distillery and electricity co-generation.
Fresh greenfield expansion of sugar capacities is unlikely due to constraints in cane availability and suboptimal utilisation of some existing capacities. While the reduction in debt will lead to a significant improvement in balance sheets, higher contribution from distillery and cogeneration operations will cushion profitability during sugar down cycles. That will make sugar producers more resilient and improve their credit risk profiles.
Says Subodh Rai, Senior Director, CRISIL Ratings: “CRISIL’s analysis of 45 large sugar companies (including those it rates and the listed ones, which together account for nearly 30% of industry production) indicates cash accrual will increase to Rs 5,600 crore over fiscal 2017 & 2018 on the back of healthy sugar prices, compared with a negative Rs 1,200 crore in the past three years. That’s despite the removal of excise incentives on ethanol, lower ethanol prices, and expected an increase in cane prices in the next sugar season. With higher cash accruals and no major greenfield capex, there could be a debt reduction by Rs 4,600 crore, from the levels seen at end of fiscal 2016.”
The debt reduction is much more significant than it seems given that working capital debt levels peak typically at the end of a fiscal due to the stocking of sugar inventory.Further, cash flows from distillery operations and co-generation will improve overall efficiencies and insulate against fall in sugar prices. These capacities also add to diversity in the revenue stream.
Sugar prices are expected to remain firm in sugar season 2017 (SS2017) because closing inventory is expected to be at an 8-year-low following a fall in production in Maharashtra and Karnataka. That’s despite the government’s recent move to allow duty-free import of raw sugar of 0.5 million tonne up to June 12, 2017, and reduction in consumption due to demonetisation. Closing inventory is expected to be 2.2 months in SS2017 compared with 3.8 months in SS2016.
Says Manish Gupta, Director, CRISIL Ratings: “We expect sugar prices to remain firm in SS2018 as well, even if production increases to ~25 million tonne – or ~4-5 million tonne more than SS2017 – due to better cane availability in Maharashtra and Karnataka. Furthermore, as the government has waited until the end of the crushing season to allow imports of 0.5 million tonnes of raw sugar into the country, we believe imports will remain range-bound and would be towards targeting physical shortages. However, the government’s policy on import and price control will remain a key monitorable.”
The government had on April 5, 2017, allowed import of 0.5 million tonnes of raw sugar at zero duty through open general licence in order to address regional production gaps and to maintain domestic prices at reasonable levels. The import will be based on zonal quantity restrictions.