ICRA expects the revenues of its sample of sugar companies to grow by 5%-7% in FY2022 on a Y-o-Y basis supported by firmed up domestic and international sugar prices given the improved demand-supply dynamics in addition to expected healthy sugar export and ethanol volumes. Notwithstanding the likely increase in cane prices, the operating margins too may remain steady at 12.5%-13.0% in FY2022 (similar to FY2021 levels) aided by current favorable pricing and revenue mix trends.
Giving more insights, Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA says, “Increased sucrose diversion towards ethanol in light of Government’s complimenting policies is likely to result in the ramp-up of ethanol supplies while limiting the sugar production. This coupled with healthy sugar export prospects for the current fiscal would aid moderation in inventory position and thus, lower borrowing levels of ICRA sample at the fiscal’s end notwithstanding ongoing debt-funded CAPEX plans (for the distillery and crushing capacities) for various players. With improved operating profits and reduced debt levels, the coverage metrics and capital structure would emerge stronger by end of the fiscal year.”
The domestic sugar prices rose to around Rs. 34,000-36,000/MT in August-September 2021 after three years following a sharp increase in global prices as well as the onset of the festive season. The international raw sugar prices firmed up to US$420-440/MT (19-20 cents/lb) in August-September 2021 compared to US$270-280/MT (12.8 cents/lb) in August-September 2020 in the anticipation of a decline in Brazilian sugar production and thus, balanced global supply position. In light of surged global sugar prices, the export prospects look promising for the upcoming sugar season even if the export policy isn’t announced. ICRA estimates India to register sugar exports of around 4-6 million MT for SY2022, thus the closing stock is expected to be at around 7.1 – 9.1 million MT as of September 30, 2022, compared to 8.6 million MT estimated as of September 30, 2021.
The sugarcane UP-SAP is expected to be hiked by Rs. 25/quintal while Fair and Remunerative Price (FRP) has been increased by Rs. 5/quintal for SY2022. Thus, for SY2022, UP-SAP would be Rs. 350/quintal for early maturing variety and Rs. 340/quintal for normal variety while FRP would be Rs. 290/quintal. Further, this would result in higher sugar production costs by ~Rs. 2.2/Kg in UP and ~Rs. 0.5/Kg in FRP followed states. However, with a favorable mix of ethanol towards B-heavy/juice (feedstock) coupled with higher sugar realizations, the likely cane price hike is expected to be comfortably absorbed by the industry and the operating margin for the sample set is expected to remain stable at 12.5%-13.0% in FY2022.
Adds Anupama Arora, Vice President & Sector Head, ICRA, “Likely hike in cane prices, especially in UP, though in line with industry’s expectations, would arrest the expansion in operating margins that could have flown from improved sugar realizations, healthy sugar exports in addition to ramped up ethanol supplies with favorable feedstock based mix. Nevertheless, the expanded scale and improved revenue mix would allow higher operating profits even as operating margin remains flat at 12.5-13%.”
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