CRISIL expects credit risk profiles of sugar manufacturers to improve over the medium term with sugar prices likely remaining firm in SS2017 and SS2018. 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.

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 in the future down-cycles and improve their credit risk profiles.
 

CRISIL’s analysis of 45 large sugar companies (accounting for nearly 30% of Industry’s production, including listed entities and those that it rates), shows that cash accrual for the sector could increase to around Rs 5,600 crore in fiscals 2017 and 2018, on the back of healthy sugar prices in SS2017 and SS2018. That’s in stark contrast to a negative Rs 1,200 crore accrual over past three fiscals. The impact of higher sugar prices is expected to be partly offset by the removal of excise duty incentives and lower ethanol prices.