ICRA: Healthy sugar exports and consumption demand to shrink closing inventory levels despite higher production

12 Apr 2022 , 12:06 PM

Domestic sugar production is estimated to increase to around 33.3 million MT for SY2022 (PY: 31.2 million MT) after considering around 3.4 million MT (PY: 2.1 million MT) sugar sacrifices towards juice/B-heavy molasses-based ethanol (6.8% higher than SY2021 despite increased diversion towards ethanol). This is 6% higher than second advance estimates of Indian Sugar Manufacturers Association (ISMA).

However, with domestic consumption estimated at around 27.2 million MT and exports expected at 7.5 million MT in SY2022, the closing stock is expected at 6.8 million MT as on September 30, 2022 (PY: 8.2 million MT). This would be equivalent to three months of consumption (PY: 3.7 months), improving the domestic demand-supply balance.

Giving more insights, Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA says, “With current favourable international sugar realisations in light of global demand-supply balance and geo-political tensions, the industry is likely to manage its closing inventory levels for the current season. However, higher sucrose diversion towards ethanol supported GoI’s focus as well as policies towards the same would be a sustainable solution to manage sugar inventory levels in medium term. This would thereby support sugar realisations which would result into both expanded profits and strengthened balance sheets.”

The revenues of ICRA samples are expected to remain stable over FY2022-FY2023 supported by higher domestic and international sugar prices and improved ethanol realisations, in addition to expected healthy and ethanol volumes, partially offset by lower sugar volumes.

Further, with favourable mix of ethanol towards B-heavy/juice (feedstock) coupled with higher sugar realisations; operating margins are expected at 12.7%-13.7% in FY2022-FY2023 (slightly higher than FY2021 levels).

Higher diversion towards ethanol coupled with healthy export prospects for FY2022 would result in lower inventory levels going forward which in turn would allow the borrowings of the sample set to decline, despite ongoing debt-funded capex plans (for distillery and crushing capacities) for various players. Further, with accretion of profits, the capital structure and coverage metrics are expected to be emerge stronger.

The domestic sugar prices (in UP) were range-bound between Rs. 31,800/MT and 32,500/MT during April-July 2021. However, the prices rose to around Rs. 33,500/MT in August 2021, tracking the global price rise, besides limited domestic supply. The uptick in prices continued in September-October 2021 reaching Rs. 35,700-Rs. 37,000/MT. However, the prices moderated in November 2021 to Rs. 35,600/MT with the onset of the crushing season and further declined to Rs. 33,600/MT-34,200/MT during December 2021- February 2022. Thereafter, geo political concerns limiting shipments as well as higher seasonal demand (in summers) resulted in price increase in March 2022, besides closure of crushing activities by a few mills for SY2022.

Further, while the global prices of raw sugar moderated to around US$401-407/MT in January-February 2022 against US$423-435/MT in November-December 2021, it improved in March 2022 on account of geo-political and logistic issues. Further, around 6.4-6.5 million MT has already been contracted for exports by Indian traders.

Adds Ms. Anupama Arora, Vice President & Sector Head, ICRA, “While India has achieved encouraging levels of average ethanol blending with petrol at 9.6% as on March 27, 2022, timely expansion of sufficient ethanol capacities for adequate supply along with well-times launch and availability of E-20 compliant vehicles as well as dispensation network by OMCs are critical meeting for EBP20 timeline.”