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Exports, ethanol boost to sweeten sugar mill margins

Sugar closing stocks are expected to decline to their lowest levels in the past four sugar seasons to 9-9.5 million tonnes in sugar season 2020-21, resulting in lower working capital borrowings.Premium
Sugar closing stocks are expected to decline to their lowest levels in the past four sugar seasons to 9-9.5 million tonnes in sugar season 2020-21, resulting in lower working capital borrowings.

  • Crisil says the announcement by the government to advance the ethanol-petrol blending target of 20% by two years to 2023, could help sustain the momentum in improvement of operating profitability over the medium term

MUMBAI : High sugar exports for the second sugar season (SS; October-September) in a row, coupled with increased supplies of ethanol—and at remunerative prices—for blending with petrol, will improve the operating profitability of integrated sugar mills by 75-100 basis points (bps) to 13-14% this fiscal, said Crisil Ratings on Wednesday.

The announcement by the government to advance the ethanol-petrol blending target of 20% by two years to 2023, could help sustain this momentum over the medium term, Crisil added.

Additionally, sugar closing stocks are expected to decline to their lowest levels in the past four SS-es to 9-9.5 million tonnes (MT) in SS 2020-21, resulting in lower working capital borrowings.

“The improvement in profitability of integrated sugar mills will be supported by higher sugar exports, with remunerative prices and increasing proportion of more profitable ethanol, which will offset the impact of lower profitability in domestic sugar sales, and subdued returns from co-generation of power," said Anuj Sethi, senior director, Crisil Ratings.

Global white sugar prices, which are currently higher than domestic sugar prices, increased by 14.3% over the last six months to 33.6 per kg (excluding export incentives) in June 2021 and are likely to remain firm, given continuing supply deficit this season, caused by lower contribution from Brazil and Thailand—the two leading sugar exporters.

This will help domestic mills meet, and perhaps exceed, their export target of 6 MT by the end of SS 2020-21. Therefore, the recent reduction in export subsidy by 2 per kg, from 5.9 per kg announced earlier, will not materially impact the profitability of sugar exports as 90-95% of sugar exports were already contracted before the cut.

In a bid to enhance the ethanol-petrol blend mix (target advanced to 20% by 2023 from 2025), sugar mills are being incentivized by the government to supply ethanol to oil marketing companies. This is reflected in a consecutive rise in procurement price for ethanol made from B-heavy molasses and sugarcane juice—prices were hiked by 6.2% and 5.3%, respectively, in the current SS. Besides, sugar mills have received interest benefits over the past two fiscals for investing in distillery capacity.

Rising revenue contribution from ethanol through these routes—which are more profitable than the traditional one using C-heavy molasses—will sweeten the profitability of the distillery business (75% of operating profits) of integrated players.

That said, operating profitability from domestic sugar sales (65% of sector revenue) will be moderately impacted due to a 4% increase in fair and remunerative price (FRP) for sugarcane, while there has been no upward revision in the minimum support price for sugar (remains at 31/kg). Non-integrated players will be more impacted compared with integrated players as they don’t have more profitable ethanol sales, said Crisil.

Inventory levels for the industry should improve despite similar sugar production of about 30 MT in the next season. This is assuming healthy exports and higher supplies of ethanol for blending with petrol resulting in lower working capital borrowings.

About 2 MT sugar production is expected to be diverted for the manufacture of ethanol in the current SS, and 3-3.5 MT in the next.

Also, advancing of blending target by two years will necessitate an increase in ethanol capacity in the country (from both grain-based and sugar diversion) over the next two years. Continuation of incentives and soft loans for ethanol, and progress on changes in automobile engine for higher blending will remain monitorable and decide the pace of further capacity addition in ethanol.

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