Exports, ethanol boost to sweeten sugar mill margins up to 100 bps

Exports, ethanol boost to sweeten sugar mill margins up to 100 bps

High sugar exports to the second sugar season in a row, coupled with high supplies of ethanol -- and in remunerative prices -- for mixing with gas, will enhance the functioning profitability of integrated sugar mills by 75-100 basis points (bps) to 13-14% this fiscal, a CRISIL Ratings analysis reveals.  Additionally, the recent statement by the authorities to progress the ethanol-petrol mixing target of 20% by two years to 2023, could help to keep this momentum within the medium term.

Furthermore, sugar closure stocks are anticipated to fall to their lowest rates before four SSs to 9-9.5 million tonne (MT) at SS 2020-21, leading to lower working capital borrowings. The improvement in profitability and controlled debt amounts will, in turn, strengthen the charge profiles of CRISIL-rated incorporated mills this financial. The charge perspective on non-integrated ones, in the opposite end, will remain mostly stable.

Says Anuj Sethi, Senior Director, CRISIL Ratings,"The improvement in profitability of integrated sugar mills will be encouraged by greater glucose exports, together with remunerative rates and increasing percentage of more rewarding ethanol, which will offset effect of reduced profitability in domestic sugar sales, and subdued yields from co-generation of energy."

Global white sugar costs, which are now higher than national sugar costs (refer annexure 1), increased by 14.3% over last 6 months to ~Rs 33.6 per kg (excluding export incentives) at June 2021 and will probably stay firm given continuing distribution deficit this year, due to reduced participation from Brazil and Thailand -- both major sugar exporters. This will aid domestic mills match, and possibly exceed their export goal of ~6 million tonne at the end of SS 2020-21. Consequently, the current decrease in export subsidy from Rs2/kg, from Rs. 5.9/kg, declared earlier won't materially affect the sustainability of sugar exports since 90-95% of sugar exports have been contracted prior to the cut.

In an attempt to boost the ethanol-petrol mix blend (target innovative to 20% by 2023 from 2025), sugar manufacturers are being incentivised from the authorities to supply ethanol to oil marketing firms. This can be reflected in a successive growth in procurement cost for ethanol (refer annexure 2) produced from B-heavy molasses and sugarcane juice -- prices were increased by 6.2% and 5.3%, respectively, in the present SS. In any case, sugar mills have obtained interest advantages within the previous two fiscals for investing in distillery capacity. 

Growing earnings contribution from ethanol by means of these paths -- that are more rewarding than the conventional one having C-heavy molasses -- will sweeten sustainability of their distillery business (75% of operating profits) of integrated players.

Nevertheless, operating earnings from domestic sugar sales (65% of industry revenue) will probably be reasonably changed because of a 4% growth in fair and remunerative cost (FRP) for sugarcane, while there's not been any upward revision in the minimum support price for sugar (stays at Rs 31/kg). Non-integrated players are more impacted in comparison with incorporated players since they don't have significantly more lucrative ethanol earnings.

Inventory levels for your sector should improve despite comparable sugar production of approximately 30 million tonne in next year. This is presuming healthy exports, and greater supplies of ethanol for blending with gasoline leading to lower working capital borrowings.  Approximately two million tonne sugar production is predicted to be redirected for manufacture of ethanol at the present SS, also ~3-3.5 million tonne in second SS.

Says Sushant Sarode, Associate Director, CRISIL Ratings,"The credit profiles of integrated players will gain from greater profitability, sensible capital of capex and reduced working capital borrowings, resulting in progress in interest coverage ratio to 4.5-5 occasions in current fiscal from ~4 times in the last fiscal.  For non-integrated gamers, however, interest cover is very likely to fall to 1-1.3 occasions from 1.5 times estimated for final financial, because of moderate effect on profitability. But lower working capital borrowings, will help keep the credit prognosis for all these players'secure' also."

Additionally, progressing of mixing goal by two years will demand increase in ethanol capability in the country (from the grain sugar and based diversion) over the next couple of decades. Continuation of incentives and soft loans such as ethanol, and advancement on changes in car motor for greater mixing will stay monitorable and determine speed of additional capacity inclusion in ethanol.

Additional gains in cane procurement price for mills, service through greater MSP, degree of export subsidies, and remunerative price for ethanol will probably stay monitorables from the street ahead.