Operating margins of sugar companies expected to moderate in FY22: ICRA

The operating margins of sugar companies are likely to moderate in FY22 due to higher production cost and reduced export subsidy, ratings agency ICRA said in a statement.

Besides, benefits from improved distillery performance was also cited by the agency as a factor that might moderate operating margins.

“In the medium term, the government support measures for higher diversion of sugar for ethanol production would reduce the sugar surplus and support in improving the demand supply dynamics of the industry on a sustainable basis,” ICRA said.

As per the agency, domestic sugar production is expected to increase by 10 per cent to 30.2 million MT in SY2021 and outstrip consumption by around 4.2 million MT.

ICRA expects sugar exports at around 5.5 million MT supported by the export policy and the closing stocks are likely to remain higher than normative sugar stock levels of 6-6.5 million MT at around 9.5 million MT for SY2021 season.

However, the stocks are expected to be lower than the previous season at around 11.0 million MT.

“Given the sugar surplus scenario in the domestic market, any significant increase in the sugar prices is ruled out in the near term. However, the higher diversion of sugar towards ethanol and the remunerative pricing of ethanol is expected to result in an improved distillery performance in FY2022,” said Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA.

“This is likely to be offset by the higher cane costs in FRP-based states, the lower recovery rates in UP in SY2021 (despite SAP being retained at previous year levels) resulting in higher cost of production and the decline in the export subsidy by 44 per cent Y-o-Y and result in moderation of operating margins for sugar companies in FY2022.”

According to ICRA, the sugar prices were around Rs 32,000 per MT in December 2020 and marginally declined to around Rs 31,500 – Rs 32,000 MT in January-March 2021.

“The moderate sugar prices are due to the dealers purchasing the sugar in high quantities in the anticipation of hike in MSP and now releasing the same into the market,” ICRA said.

“In 5M SY2021, the sugar prices have been lower by 2.4 per cent Y-o-Y at Rs 31.8 per kg.”

Accordingly, the subsidy per unit came out to be 44 per cent lower than the earlier one, that too against an increase in the global raw sugar prices in the recent months – December 2020 and January 2021 to 14.67 cents and 15.94 cents per pound respectively compared to 13.34 cents and 14.18 cents per pound respectively in the corresponding previous.

Currently, the export sugar realisation (inclusive of subsidy) is largely similar to the domestic sugar realisations further, the exporting mills would save on the interest and storage costs to the extent of sugar exported.

“This apart, export volumes will relieve the pressure on domestic sugar stocks and thus support domestic sugar realisations to a certain extent.”