Sugar mill operating margins goes up by 300-400 bps, cane arrears lowers to 18% this season

Operating margins of sugar millers could improve by 300-400 basis points (bps) in sugar season (SS) 2019 (October
1, 2018, to September 30, 2019) following a ~7% increase in the minimum support price to Rs 31 per kg from Rs 29
announced by the government last Thursday.

This will lead to incremental domestic sales realisation of ~Rs 3,300 crore, while higher export prices will facilitate another ~Rs 200 crore. That will help sugar mills reduce their cane arrears, which stands at Rs 20,000 crore now, by
~18% to ~Rs 16,500 crore. It will also cut the losses that millers have received because of excess supply and tepid

Raw material cost as a proportion of sugar sales rose to about 90% in the current season following an uptick in
the Fair and Remunerative Price (FRP) of sugarcane, and subdued sugar prices owing to oversupply both locally
and globally. Though the government took steps to arrest the losses of millers, non-integrated units continued to
bleed in this season.

Says Gautam Shahi, Director, CRISIL Ratings, “Higher minimum support price (MSP) would mean non-
integrated millers could break even or report low single-digit operating margins of 2-5% this season compared with 1-2% in SS 2018, while integrated players could see that number up 13-15% compared with
9-12%. Integrated sugar millers will also continue to benefit by fast-tracking ethanol manufacturing.”

In global markets, sugar production is expected to decline nearly 5% to 185 million tonne. That should support a gradual
clearing of inventories and bolster prices in SS 2019. The recent, but modest, improvement in global prices, which
will support exports from India, is evidence of that. Better realisations and profitability will also ease stretched working capital requirements and cane arrears of millers in the near term.

Says Hetal Gandhi, Director, CRISIL Research, “Increase in MSP would definitely reduce arrears from current
highs to Rs 16,500 crore by end of SS 2019, nevertheless they will continue to stay above the average of ~Rs
9,000 crore over the last 3 sugar seasons.”

CRISIL-rated companies account for about 25% of the sugar industry’s revenue.
The credit profiles of sugar mills have moderated compared with last fiscal because of continued losses at the
operations level, increasing capital expenditure intensity because of investments planned in distilleries, and stretched working capital requirements. This is also reflected in the sugar sector’s credit ratio (or rating upgrades to
downgrades) of 0.3 time in the first 9 months of fiscal 2019.

With expected increase in profitability and cash generation, liquidity and debt metrics of millers are likely to improve
in fiscal 2020. For instance, the debt to EBITDA ratio of CRISIL-rated sugar mills is expected to marginally improve
to about 4-4.5 times in fiscal 2020 compared with the estimate of ~5 times for fiscal 2019.

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