Sugar Millers Say Higher MSP Will Stabilise Margins Despite A Glut

As the sugar industry battles a supply glut, millers expect the increase in factory-gate minimum support price to stabilise margins.

“Finally, we have a constant-margin business that we have been asking for,” Narendra Murkumbi, non-executive director at Shree Renuka Sugars Ltd., told BloombergQuint in an interaction. “The government has managed to stabilise the margin despite a large surplus. As long as that can continue, and that will continue until the surplus is unbearable, I think we have the industry in a sweet spot.”

The government increased the MSP for sugar producers by Rs 2 to Rs 31 a kilogram. That may help companies sell more locally as stockpiles exceeded local demand on a twofold rise in output from a year earlier to 15.4 million metric tonnes as of Dec. 31, according to the Indian Sugar Mills Association data. Higher MSP will also help repay part of the cane growers’ arrears that stood at around Rs 20,000 crore at the end of January.

Murkumbi and Vivek Saraogi, managing director at Balrampur Chini Mills Ltd., estimate a lower sugar output for the next year.

“For India, the output would come 4 million tonnes less due to reduced planting in Maharashtra and Karnataka,” Murkumbi said. If the monsoon isn’t good, it will go even lower, according to Saraogi.

Ethanol Impact

Increase in factory-gate prices for sugar millers comes when the high-margin ethanol business has started providing a support to sugar companies. The distilleries business—that contributes 7-14 percent to the revenue of India’s three large sugar makers—accounted for 51-56 percent of their profit before interest and tax in the first nine months of the ongoing financial year, according to exchange filings.

Still, Murkumbi doesn’t see ethanol production to make a significant impact across the industry. A miller needs about Rs 5,000 crore to Rs 7,000 crore worth of capital expenditure to start new ethanol capacity. While the companies already doing it would see higher ethanol production and an increased contribution to the overall margin, the impact would be limited for the overall industry.

Watch the full interaction here: