Duty hike to boost profitability of sugar mills: Crisil

Profitability of sugar mills is set to improve and farmers are expected to get timely payments after government increased import duty and restricted sugar sales, said a report. Government had early this month increased import duty on raw and white sugar to 100 per cent to curb cheaper imports and ensure remunerative prices to growers. It also restricted sugar sale by imposing stockholding limits for February and March to contain falling prices.

“The twin government moves are expected to prop up falling sales realisations, support the profitability of sugar mills by enabling them to tide over the supply glut, and keep their credit profiles stable,” rating agency Crisil said in a report today. “For farmers, this means timely payments for cane, and curbing fresh build-up of arrears on this count,” it added.

Sugar prices fell nearly 18 per cent between October 2017 and January 2018 in anticipation of surplus production.That, along with higher cane prices – up 11 per cent for the ongoing sugar season (October-September) – have piled up pressure on the profitability of sugar mills, it noted.

According to Subodh Rai, a senior director at Crisil, global sugar prices are already down a quarter from the last season’s average because of surplus production. “Hence, we believe the doubling of customs duty to 100 per cent is a timely intervention to restore domestic balance and protect the profitability of millers,” he said. Rai feels this will provide a cushion of Rs 6-7 per kg to an integrated sugar mill against a further fall in global prices.

Crisil expects good monsoons and higher cane acreage to boost sugar production in the ongoing season to over 26 mt, 6 mt higher than the previous season, even as demand remains unchanged around 25 mt. The rating agency believes the sales restriction for two months, requiring mills to keep at least 83-86 per cent of the closing stock of the previous month, and forbidding sale of quantities produced in February and March in the same month, will restrict supply in the interim. “Notwithstanding higher inventory holding costs, controlled supplies should restrict further declines in sugar realisations before production closes by April,” it said.

Crisil also expect the credit profiles of sugar companies to remain stable, buoyed by improving price scenario and deleveraging. “However, we will continue to monitor for sharp movement in cane prices in the next sugar season, sowing acreage and regulatory measures,” said Manish Gupta, a director, at Crisil.