Sugar mills face margin squeeze

The profit margins of sugar mills are likely to remain under pressure in October-December due to a sustained decline in the price of sugar following forecasts of higher production. The food ministry recorded a 7 per cent decline in the average sugar price in December to Rs 3,470 a quintal from Rs 3,733 a quintal a year ago. The average sugar price has declined by nearly 2 per cent in October-December from the same quarter a year ago.

Mills produced 6.94 million tonnes of sugar till December 15, up from 5.35 million tonnes a year ago, and are selling sugar at 8-10 per cent lower than its production cost due to excess cane availability. India’s sugar output is expected to rise 25 per cent to 25.1 million tonnes this year. Prices of molasses, rectified spirit and bagasse have also declined by up to 75-80 per cent, year on year, on estimates of higher cane crushing.

“Margins of sugar mills will come under pressure,” said BJ Maheshwari, wholetime director and company secretary, Dwarikesh Sugar Industries. Most sugar mills had reported healthy profits in the October-December quarter last year.

Sugar prices have declined by nearly 15 per cent since the beginning of the current crushing season in October, with the sugar S variety quoted at Rs 3,050-3,100 a quintal. The Indian Sugar Mills’ Association (ISMA) estimates sugar production cost at Rs 37 a kg. Most sugar mills are thus incurring losses.

Sources said sugar mills, including large ones, were selling their output at distress prices to pay to cane farmers on time. Mills do not want to accumulate cane arrears after state governments directed them to clear these dues on priority.

A recent report by credit rating agency Crisil said cane procurement costs were 2-3 per cent higher than the realisation for sugar mills. Cane costs are set to rise by 11 per cent in the 2017-18 season. Earnings before interest, depreciation, tax and amortisation margins of sugar mills were set to decline by 200-250 basis points in the 2017-18 season, the report added.

Integrated sugar mills in north India should perform relatively better than those in the south, the report said.