BackFalling sugar prices, rising cost of cane could crush profitability
Falling sugar prices, rising cost of cane could crush profitability
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New Delhi: Sugar companies in India, the world’s second-biggest producer, could sink into the red as the prices of the sweetener are declining while cost of sugar cane is rising, an investment research firm has said.
“At sugar realizations of Rs14,000 per tonne and the sugar cane cost of Rs1,350 per tonne (factory gate prices in Uttar Pradesh) the Ebitda (earning before interest, tax, depreciation and amortization) of sugar companies would be close to zero," research firm PPFAS said in a report.
When asked whether this means sugar companies would not post net profit and instead make losses, PPFAS analyst Abul Fateh said: “Logically yes... they should post net losses." Citing an example, he said companies earn up to 83% of their revenue from selling and so, the fall in prices of the sweetener would adversely affect their profit margins.
The report pointed out that domestic prices of sugar have dropped by more than 20% since the beginning of the ongoing sugar season that started in October 2006.
Sugar prices in the wholesale market were ruling at around Rs19,000 a tonne till about six months ago. Painting a pessimistic picture about the sugar industry in the short term, the report said: “We do not see any improvement in the realizations in the near future but a possibility of further decrease in the realization cannot be ruled out."
The report says profitability of sugar mills, especially those which produce only the sweetener and not ethanol, is likely to worsen due to the expected narrow gap between the price realization and sugar cane support price.
Standalone players would be severely hit, but even integrated players would be no better off as sugar contributes the most to revenues, Fateh added.
The research firm said, with bumper sugar output forecast for the current and next sugar season, the inventories have already started piling up. This was evident from the falling sugar prices, it said.
Price realizations for sugar mills in northern India range between Rs13,500 and Rs14,000 per tonne, while those in the south get between Rs13,300 and Rs13,800 per tonne.
Sugar production in India may exceed earlier estimates and cross 260 lakh tonnes in 2006-07 against 193 lakh tonnes last year. With carryover stock of about 40 lakh tonnes, the sugar availability is likely to reach 300 lakh tonnes. This would take the surplus to 110 lakh tonnes as consumption is projected at 190 lakh tonnes.
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