Rising sugar prices have been offset by rising cost of cane

High prices in sugar season (SS) 2016-17 and higher production in SS 2017-18 is of little cheer to mills because the differential between sugar prices and cost of cane continues to narrow. Cane cost are set to rise by 11% while sugar prices moderate marginally in SS 2017-18. As a result, CRISIL Research expects Ebidta (earnings before interest, depreciation, tax and amortisation) margins to drop 200-250 bps in SS 2017-18, despite buoyant production.

Raw material accounts for over 70% of the cost for sugar mills, and impacts margins the most. The more the gap between sugar prices and cane cost, the better is the margin for mills.

IIn SS 2014-15, when the gap between cane cost and sugar prices vanished, mills couldn’t make much at the operating level. Although prices have picked up since SS 2015-16 and touched a decadal high in SS 2016-17, it has remained nearly 60% lower than cane cost at Rs 856 per quintal compared with ~Rs 1,400 per quintal in the previous upcycle of SS 2009-10, which underscores little margin improvement.