A raft of government measures earlier this month have come as a relief for sugar mills and sugarcane farmers alike. These include increase in import duty on raw and white sugar to 100%, and restriction on sugar sales by imposition of stockholding limits for February and March.

Domestic sugar prices fell nearly 18% between October 2017 and January 2018 in anticipation of surplus production. That, along with higher cane prices – the ‘fair and remunerative price’ is up 11% for the ongoing sugar season (October 1 to September 30) – have piled up pressure on the profitability of sugar mills.

The twin government moves are expected to prop up falling sales realisations, support the profitability of mills by enabling them to tide over the supply glut, and keep their credit profiles stable.

For farmers, this would mean timely payments for cane, and curbing fresh build-up of arrears on this count.

Says Subodh Rai, Senior Director, CRISIL Ratings, “Global sugar prices are already down a quarter from the last season’s average because of surplus production. Hence, we believe the doubling of customs duty to 100% is a timely intervention to restore domestic balance and protect the profitability of millers. This will provide a cushion of Rs 6-7 per kg to an integrated sugar mill against a further fall in global prices.”

Good monsoons and higher cane acreage are expected to boost sugar production in the ongoing season to over 26 million tonne (MT) – a good 6 MT higher than the previous season – even as demand remains unchanged around 25 MT.

The sales restriction for 2 months – requiring mills to keep at least 83-86% of the closing stock of the previous month, and forbidding sale of quantities produced in February and March in the same month – will restrict supply in the interim. Notwithstanding higher inventory holding costs, controlled supplies should restrict further declines in sugar realisations before production closes by April.

That’s in contrast to the lower stockholding limits imposed on mills and traders towards the end of last season, which led to faster stock liquidation by mills and restricted traders from building speculative positions. Mills also used cash flows to make payments to farmers and consequently, more than 98% of the previous season’s cane dues were paid by January 2018.

An 8-10% improvement in sugar realisation from the lows seen at the end of January 2018 will help mills to moderate the decline in their profitability this fiscal and would ensure there is no substantial build-up of cane arrears.

CRISIL believes exports up to 1 MT could be considered (as was the case from SS2014-16 when the government also gave subsidies on sugar exports) to close inventories at the end of SS2018 at around 2 months of consumption – nearly the same level as in the previous season – and ease the supply glut.

To their credit, while profitability has weakened – margins of integrated mills are expected to shrink by around 5% in fiscal 2018 – players have cushioned their balance sheets by prepaying debt using strong cash flows over the past 24 months (refer to an April 2017 CRISIL release titled ‘Sugar sector balance sheets set to turn sweeter’).

The total debt of the top 10 sugar companies is down ~15% to Rs 15,200 crore as on September 30, 2017 from ~Rs 17,800 crore as on September 30, 2015.

Says Manish Gupta, Director, CRISIL Ratings, “We expect the credit profiles of sugar companies to remain stable, buoyed by improving price scenario and deleveraging. However, we will continue to monitor for sharp movement in cane prices in the next sugar season, sowing acreage and regulatory measures.”