FY18 Sugar Outlook
India Ratings and Research (Ind-Ra) has assigned a stable outlook on the sugar sector for FY18 as the agency believes that production recovery in sugar season October 2017 to September 2018 (SS18) is likely to constrain any further increase in the commodity price from 1HSS18 (October 2017-December 2017). With average domestic sugar price expectation of INR37-40/kg (6% higher than expected FY17 prices) in FY18, high cane procurement costs are likely to constrain EBIDTA below FY17 levels. This is likely to result in credit profiles of sugar companies remaining largely similar or marginally worse-off than FY17.Industry reports estimate that global sugar deficit is likely to contract in SS18 with India registering production of 25 million metric tons, amid improving acreage levels in Maharashtra and Karnataka. The stock-to-use ratio for SS18 is likely to improve to 14.7%, following an anticipated decline to 13.7% in SS17 (October 2016 to September 2017) and 28.3% in SS16. In the agency's assessment, lucrative cane prices and normal monsoons would drive production gains in the country.
Ind-Ra expects UP-based millers to fare better than their southern and western counterparts, despite assuming a higher cane costs (10% yoy increase in state advisory prices for SS18). Ind-Ra expects the profitability of UP-based sugar companies to be 10%-15% lower in FY18 than the estimated FY17 level, due to higher cane costs (premium over and above state-advised price to farmers). In the absence of major working capital changes and capex plans, the credit metrics for FY18 for UP-based millers is likely to maintain or improve from estimated FY17 level.
Ind-Ra expects millers to produce higher distillery volumes in SS18. The ability to divert the same towards ethanol, and the consequent achievement of a higher blending rate for FY18 would largely depend on the pricing of alternative fuels.
Outlook Sensitivities
Recovery in Sugar Cycle: Higher-than-anticipated global sugar production due to sharp production recovery levels at end-SS18 may rapidly transform the current scenario to a high surplus one. In such an event, sugar prices could be under pressure resulting in lower margins thereby impacting credit profile of sugar companies.
Favourable Policy Changes: Pan-India changes in the regulatory policies i.e., linking of raw material cost (cane prices) to the sugar and by-products' realisations would help millers gain better control over their profitability and balance sheets. This is because the profitability would depend on individual operational efficiencies, thus positively impacting their credit profile.
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