Fitch Ratings says that the outlook for Indian integrated sugar manufactures will remain stable in 2012, driven largely by the expectation that any drop in sugar cash flow during 2012 will be partially offset by additional cash flow from ethanol and power. Further, the lack of any significant capex could result in positive free cash flows with leverage metrics being maintained or showing some improvement over 2011. However, outlook for standalone sugar mills is negative.
Fitch believes that with the rising sugarcane price - a major component of the sector's overall cost, overall profitability, which remains skewed towards the sugar segment, would be impacted. However, better capacity utilisation in 2012, due to higher sugarcane availability coupled with improved sugar recoveries, are expected to translate into higher sugar production and improved performance from allied products namely distillery products and power.
The agency also notes sugar prices would remain firm in 2012 on the assumption that exports would be allowed for production in excess of domestic demand. This, however, remains a regulatory risk and reduction in exports could be negative even for integrated producers. Prices for allied products are also expected to remain firm.
The sector's liquidity could be pressurised due to higher interest costs and requirements for higher inventory, given the increasing cost of sugarcane and higher production. Liquidity concerns for integrated sugar mills are partly mitigated due to cash flow generated by the sector's diversified revenue streams. Further, Fitch believes that appropriate timing of exports would also help ease liquidity pressures. However, for independent sugar mills whose profitability is dependent entirely on sugar margins, liquidity pressures could become a concern.
A significant fall in sugar prices and/or any significant decline in allied product prices may revise the outlook for integrated sugar manufacturers to negative. Further, significant debt-funded investment on allied products coupled with the cyclicality and volatility associated with the sector could hamper the credit profiles and therefore the outlook of integrated sugar manufacturers.
Fitch rated Indian sugar entities include Shree Renuka Sugars Ltd ('Fitch A+(ind)'/Stable) and Bajaj Hindusthan Limited's ('Fitch A(ind)'/Negative/'Fitch A1(ind)').