Higher domestic sugar prices and increasing sales of ethanol will help offset the rise in sugarcane cost and lower exports in fiscal 2024, leading to stable operating profitability for integrated sugar mills, or those with sugar, distillery and power co-generation facilities.

Domestic sugar prices have increased by about 5% between March and June this year to ~Rs 34/kg after remaining flat at ~Rs32/kg for the past two fiscals (refer chart 1 in annexure). This is because the total production is estimated to be lower by nearly 7% for the ongoing sugar season¹ (SS 2023) due to unseasonal rains in key growing areas of Maharashtra and Karnataka.

Prices are expected to hold at these levels in the short term as net sugar production (post diversion for ethanol) is expected to see only a modest increase in the next season (SS 2024) due to higher diversion for ethanol (~5 million tonne vs 4 million tonne in the ongoing season).

Being an essential commodity, the entire value chain of sugar - including procurement price of sugarcane, quantum of monthly sugar distribution and its annual export quota, as well as the prices of ethanol - is regulated by the government. Even, the quantum of exports is determined considering sugar production (net of diversion for ethanol), domestic consumption, and need to maintain stock for consumption during the lean season.

The Cabinet Committee on Economic Affairs recently announced an increase in the fair and remunerative price (FRP) for sugarcane by ~3.5% to Rs 315 per quintal for the next season. Ethanol prices, which typically are adjusted as per the increase in cane prices, are also expected to see a modest increase shortly, as seen in the past (refer chart 2).

Says Poonam Upadhyay, Director, CRISIL Ratings, “Tailwinds from steadily growing ethanol volume and better realisation, supported by the government’s policy, basis which price of ethanol derived from sugarcane has been revised by ~3-4% annually, will offset the impact of higher cane prices. This, together with recent improvement seen in domestic sugar realisations will keep the operating profitability of integrated sugar mills steady at 11-12% in fiscal 2024, compared with ~11% last fiscal, despite lower export volumes.”

That said, operating profitability of millers that depend primarily on sale of sugar and do not have distillery plants, may get impacted as they will lose out on the recent surge in international prices of sugar which are ~55% higher than the domestic prices (refer chart 1). This is because the sugar mills have already exhausted the export quota of 6.1 million tonne approved for the ongoing season and there is limited possibility of further increase. To be sure, exports have already declined ~46% on-year in the current season compared with SS 2022.

A CRISIL Ratings analysis of 24 sugar mills, with total revenue of ~Rs 41,000 crore last fiscal, indicates as much.

Says Anil More, Associate Director, CRISIL Ratings, “We expect credit quality for integrated millers to remain largely ‘stable’. With cashflow generation remaining steady and working capital requirement under control, debt levels will rise only for players augmenting distillery capacity for ethanol production. Here, too, continuing interest subvention scheme to fund such loans, will largely offset the impact of higher overall interest rates, thus limiting the slide in interest cover to 6.4 times in fiscal 2024 from ~7 times last fiscal.”

The interest cover of millers that primarily sell sugar will, however, be impacted due to lower cash flows from operations.

Domestic sugar price movement, quantum of rainfall and reservoir levels, and average sugarcane yield will bear watching in the road ahead.

¹Sugar season refers to the period from October to September