Sugar sector balance sheets set to turn sweeter: Crisil

The credit risk profiles of sugar manufacturers are likely to improve over the medium term with sugar prices expected to remain firm over the current and next sugar seasons (October 1 to September 30).

The resultant? higher profit and cash accrual is expected to be used by manufacturers to either reduce debt or invest in the? ?relatively more stable ancillary business of distillery and electricity co-generation, according to a report by Crisil.

Fresh greenfield expansion of sugar capacities is unlikely due to constraints in cane availability and sub-optimal? utilisation of some existing capacities. While reduction in debt will lead to a significant improvement in balance? sheets, higher contribution from distillery and cogeneration operations will cushion profitability during sugar? downcycles. That will make sugar producers more resilient and improve their credit risk profiles.

''Crisil's analysis of 45 large sugar companies (including those it rates and the listed ones, which together account for nearly 30 per cent of industry production) indicates cash accrual will increase to Rs5,600 crore over fiscal 2017 and 2018 on the back of healthy sugar prices, compared with a negative Rs1,200 crore in the past three years. That's despite the removal of excise incentives on ethanol, lower ethanol prices, and expected increase in cane prices inthe next sugar season,'' said Subodh Rai, Senior Director at Crisil Ratings.

''With higher cash accruals and no major greenfield capex, there could be a debt reduction by Rs 4,600 crore, from the levels seen at end of fiscal 2016,'' he added.

The debt reduction is much more significant than it seems given that working capital debt levels peak typically at ? the end of a fiscal due to stocking of sugar inventory. Further, cash flows from distillery operations and co-generation will improve overall efficiencies and insulate against fall in sugar prices.

These capacities also add to diversity in the revenue stream.

Sugar prices are expected to remain firm in sugar season 2017 (SS2017) because closing inventory is expected ? to be at an 8-year-low following a fall in production in Maharashtra and Karnataka. That's despite the? government's recent move to allow duty-free import of raw sugar of 0.5 million tonne upto June 12, 2017, and? reduction in consumption due to demonetisation. Closing inventory is expected to be 2.2 months in SS2017? compared with 3.8 months in SS2016.

''We expect sugar prices to remain firm in SS2018 as well, even if production increases to about 25 million tonne – or about 4-5 million tonne more than SS2017 – due to better cane availability in Maharashtra and Karnataka. Furthermore, as the government has waited till the end of the crushing season to allow imports of 0.5 million tonne of raw sugar into the country, we believe imports will remain range-bound and would be towards targeting physical shortages. However, the government's policy on import, and price control will remain a key monitorable,'' said Manish Gupta, director, Crisil Ratings.

The government had on April 5, 2017, allowed import of 0.5 million tonne of raw sugar at zero duty through open? general licence in order to address regional production gaps and to maintain domestic prices at reasonable levels. The import will be based on zonal quantity restrictions.