ICRA: Cane production subsidy may marginally improve sugar mills OPM but overall outlook remains weak

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Given the depressed sugar prices during the current season, following expectations of a bumper sugar production during SY2018, the Government of India (GoI) has notified a cane production subsidy of Rs. 55/MT, which would be paid directly to farmers as part of the cane costs. Sugar mills meeting 100% of the target notified under the Minimum Indicative Export Quota (MIEQ) are eligible for this subsidy. The total subsidy amount is expected to be around Rs. 1,540 crore, less than a tenth of the outstanding cane dues to sugar farmers.

Commenting on this, Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, said: With the reduced cane costs, the total contribution margin is likely to increase by around ~Rs. 500/MT of sugar produced, which translates into a one-and-a-half per cent margin at the operating level. However, inspite of the expected marginal improvement in operating profitability, the overall profitability outlook for the sugar sector remains weak for FY2019. On the positive side, however, the production subsidy aims to expedite the pace of exports, which in turn is expected to relieve the pressure from domestic sugar stocks and raise domestic sugar realisations to an extent, thereby offsetting losses from sugar exports.”

In March, 2018, the Food and Consumer affairs (FCA) Ministry has allowed for sugar exports of 2 million MT under the Minimum Indicative Export Quota (MIEQ) scheme during SY2018. Under this scheme the export quota has been fixed, taking into account the average production of mills achieved in the last two years and up to February of this marketing year. The Government has also allowed the export of white sugar till September 2018 under the Duty Free Import Authorisation (DFIA) scheme, whereby exporters are allowed to import sugar at zero duty within three years. However, with expectations of a sizeable surplus in the global sugar market in 2018, the international sugar prices are hovering at around $350/MT, which, adjusted for transportation costs, the exports per MT would fetch around Rs. 18,000 – 19,000/MT, lower by around Rs. 8,000 – 9,000/MT, compared to the prevailing domestic sugar prices. Hence, the sugar mills have not started exporting sugar as they would have to incur upfront losses.

The cane production subsidy aims to provide financial assistance to the millers in the form of offsetting cane costs in order to enable sugar mills to clear their cane dues in view of a sharp decline in domestic sugar prices to Rs. 26,000 – 27,000/MT. With the average cost of sugar production at around Rs. 35,000-36,000/MT, this translates to a loss of Rs. 9,000-10,000/MT of sugar sold.

“According to ICRA estimates, even after meeting the target of exporting 2 million MT, the domestic market would still have around 2.5 – 3.0 million MT of excess sugar stocks than the normative sugar stock for the next season. Hence, while the sugar prices are likely to improve with the successful implementation of MIEQ, any significant increase from the current levels can be ruled out, given the continued oversupply scenario in the domestic market,” Mr. Majumdar added.

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