Sugar mills’ margins likely to be tempered in FY2018: ICRA

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The margins of sugar mills are expected to come under some pressure from Q3 FY2018 onwards, based on the latest estimates by ratings agency, ICRA. It is anticipated that sugar stocks will be around 4.0 – 4.5 million MT at the end of the forthcoming sugar season SY2018. Sugar production is likely to be around 24.5 million MT in SY2018, up from 20.3 million MT in SY2017. However despite the increase in sugar production, the sugar stocks would at best be at the same level as the estimated consumption too will be around 24.5 million MT in SY2018. While this expected tight stock situation, along with the recent increase in the import duty on sugar from 40% to 50% is likely to support the domestic sugar prices in the near term, the increase in cane costs for the coming crushing season will impact margins.

According to Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, “The tight sugar stock situation in the domestic market, coupled with the hike in import duty, is likely to support the sugar prices in the near term. But increase in cane prices may result in some moderation in margins from Q3 FY2018 onwards, despite firm sugar prices. Under the emerging scenario, the margins and cash flow generations for most mills with efficient operations, forward integration and adequate cane availability are likely to remain satisfactory.”

The Cabinet Committee on Economic Affairs (CCEA) has fixed the fair and remunerative price (FRP) at Rs. 255/quintal for SY2018 season, an increase of around 11% compared to the previous year. This is likely to increase the cost of production for sugar mills in FRP-following states such as Maharashtra, Karnataka, Andhra Pradesh, and Telangana etc. The mills in these states are likely to be negatively impacted by higher costs.