Increase in profitability for sugar mills

According to CRISIL Ratings, the operating profitability of integrated sugar mills will increase by 75-100 basis points (bps) to 13-14% in FY 2021-22. This has been due to the continued trend of high sugar exports in the second season (SS, i.e., October-September), accompanied by an increased supply of ethanol for blending with petrol.

The announcement by the government to raise the ethanol petrol blending target of 20% by the next two years (i.e., to 2023) can help in sustaining this momentum in the medium term. Anuj Sethi, senior director at CRISIL Ratings, said, “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.”

Furthermore, sugar closing stocks are expected to fall to their lowest level in the past four SS-es to 9-9.5 million tonnes (MT) in SS 2020-21 which will lead to lower borrowings for working capital.

Global prices of white sugar are currently more than the domestic prices, with the global prices reaching Rs. 33.6 per kg (excluding export incentives) in June 2021. The level is expected to remain at the current position due to the supply deficit during the current season, caused by lower contribution by the two largest sugar exporters- Brazil and Thailand. This will support the domestic mills in meeting their export target of 6 MT by the end of SS 2020-21.

The move to advance the blending target by two years will lead to an increase in ethanol capacity during the next two years. Furthermore, the continuation of soft loans and incentives and progress on changes in automobiles engine will decide the pace of addition of further capacity in ethanol.