Indian Sugar Industry- From Rags to Riches

Falling of ex-mill sugar prices below production costs, mounting losses for sugar mills and
accumulating cane price arrears leading to compulsive shut-downs—from this stage, the Indian
Ratings

Sugar Industry (ISI) is now exhibiting signs of complete turnaround with surging sugar prices
and depletion in buffer sugar stocks due to decrease in global as well as domestic production
and steady growth in sugar consumption.

Industry Overview
September 2, 2016

Sugar, the second-largest agro-based industry in India, is a sector of immense importance to the Indian
economy. ISI impacts livelihoods of about 50 million farmers and their families and provides direct
employment to over 5 lakh skilled and semi-skilled persons in sugar mills and related industries.
For past two sugar seasons (SS; refers to the period October 1 to September 30) ended SS2015-16, the ISI
has been witnessing a challenging phase marked by extreme volatility in sugar prices and lopsided
margins for the sugar mill owners.

Sugar prices U-turn in past three sugar seasons

Source: Indian Sugar Mills Association

The sugar prices started declining from August 2014 on account of surplus sugar stock both in domestic
and global markets. Sugar production exceeded the sugar consumption levels for past five consecutive SS

1
Ratings

from SS2010-11 to SS2014-15. Wholesale price of sugar slumped from Rs.33.76/kg in August 2014 to a
low of Rs.26.40/kg in August 2015 and remained below Rs.30/kg for almost half of production period in
the SS2015-16.
The situation at present, however, seems totally reversed where the major cause of concern for the
government is surging sugar price. The sugar price started picking up from September 2015 and since
then it has been on a continuous uptrend. In August 2016, sugar price prevailed at Rs.37.86/kg in
wholesale market and crossed the price level of Rs.40/kg in the retail market.

Reversal in the Global Production-Consumption pattern after five sugar seasons

The global consumption of sugar has shown rising
trend on consistent basis. On the other hand, the
global sugar production declined by 7% from
177.22 million metric tonnes (MMT) in SS14-15 to
164.92 MMT in SS15-16 causing a global sugar
deficit in SS15-16 after 5 consecutive SS of surplus
from SS10-11 to SS14-15.
The sugar production declined by 12.13 MMT in
SS15-16 of which 98% of the aforesaid decline is
contributed by top 5 sugar-producing
countries/regions, namely, Brazil, India, European
Source: United States Department of Agriculture
Union, Thailand and China.
Country/Region 2014-2015 2015-2016 Decline (MMT) Decline (%)
Brazil 35.95 34.65 1.30 3.62
India 30.46 27.70 2.76 9.06
European Union 18.45 14.00 4.45 24.12
Thailand 10.79 9.74 1.05 9.73
China 11.00 8.43 2.57 23.36
Total 106.65 94.52 12.13 11.37
Source: United States Department of Agriculture

The sugar production of Brazil, the world’s largest sugar producer, declined on account of higher
Source: United States Department of Agriculture
percentage of sugarcane [59% of total sugarcane production (estimated)] being converted to ethanol due
to the increase in mandated ethanol blending in gasoline, from 25% to 27%.

Indian Sugar Industry – From Rags to Riches 2

Ratings

Production in the European Union declined due to reduced sugar beet area. Thailand’s production
reduced on account of drought-induced yield decrease and sugarcane diversion for ethanol production
and China’s production declined on account of decrease in the area under cultivation due to high
producer costs.

Steep fall in Indian sugar production during SS15-16

India’s sugar production is estimated at about
25.20 MMT in SS2015-16, a 10.95% drop from
SS2014-15 sugar production of 28.30 MMT. At the
same time, sugar export is expected to remain
about 2 MMT higher than import in SS2015-16.
This would result into depletion in closing stock of
sugar from about 9 MMT at the end of SS2014-15
to about 7.2 MMT at the end of SS2015-16. This
decline in Indian sugar production is attributed
primarily to drought in states of Maharashtra
(largest sugar-producing state in India) and
Source: Indian Institute of Sugarcane Research
Karnataka (third largest). There is huge fall in
these two states — from 10.52 MMT to 8.40 MMT; a decline of 20% in Maharashtra and from 4.99 MMT
to 4.10 MMT; a decline of 18% in Karnataka.

Impact of Exports-Import Policy of Government on ISI

During SS2014-15, in order to improve domestic sugar price sentiments and make Indian sugar export
competitive in international market, the government introduced various measures to boost exports and
curtail sugar imports. In September 2015, Government announced Minimum Indicative Export Quotas
(MIEQ) for mills and co-operatives for mandatory exports of 4 MMT of sugar in 2015-16. On the other
hand, as a measure to curb imports, the Government had enhanced import duty on sugar from 25% to
40% from April 30, 2015.

Indian Sugar Industry – From Rags to Riches 3

Ratings

As a result, the export increased by 12.40% from

2.58 MMT in FY15 (refers to the period April 1 to
March 31) to 2.90 MMT in FY16. On the other
hand, sugar import during the same period
increased marginally by 0.10 MMT to 1.10 MMT.
On account of sharp increase in the prices of
sugar the GOI has now withdrawn scheme of
MIEQ w.e.f June 8, 2016, and has introduced
export duty of 20% from June 16, 2016.

Source: Import-Export Data Bank

Government initiated cane arrears reduction measures given impressive results

Production Linked Subsidy
In order to revive the ailing sugar industry and reduce cane price arrears, the government in December
2015, announced production subsidy @ Rs.4.50 per quintal of cane crushed which shall be paid directly to
the farmers on behalf of the mills. The production subsidy, however, now stands withdrawn as the prices
are substantially higher than what is required for making operations viable for the sugar industry.
Soft Loan Scheme
In June 2015, a scheme for extending soft loans to the extent of Rs.6,000 crore to the sugar industry was
introduced to facilitate clearance of cane price arrears of the farmers for the SS14-15 relating to FRP (Fair
& Remunerative Prices) fixed by Central Government. The government would bear interest burden up to
10% simple interest or actual rate of interest, whichever is lower, for maximum period of one year by way
of interest subvention.
Ethanol Blending Program (EBP)
Blending targets under EBP has been scaled up from 5% to 10%. In January, 2015 remunerative prices for
Ethanol supplied under EBP have been fixed in the range of Rs.48.50-49.50 per litre, a substantial increase
over previous years. For the SS15-16, the government had also waived-off excise duty on ethanol supplied
for blending in order to further incentivise the mill owner.

Indian Sugar Industry – From Rags to Riches 4

Ratings

However, with the improvement in liquidity of sugar mills on account of rise in sugar prices the exemption
from excise duty on ethanol supplied for
blending now stands withdrawn w.e.f
August 10, 2016.
The above steps taken by the government
have augured well for ISI and as per the
latest report of ISMA, cane arrears have
come down to about Rs.6,225 crore as on
June 09, 2016, from about Rs.18,249
crore outstanding as on March 15, 2015.
Source: Department of Food and Public Distribution; Indian Sugar Mills
Association

Revival in operating performance of Indian sugar companies during H2FY16

(Rs. Crore)
Particulars H1FY15 H2FY15 H1FY16 H2FY16
Total Income 12,572 13,343 11,893 15,085
Operating Expenses 12,123 13,175 11,640 12,538
PBILDT 449 169 253 2,547
Depreciation charges 446 469 431 518
Interest Expenses 1,032 1,019 1,033 970
Profit before tax -1,029 -1,319 -1,210 1,059
Income Tax -157 -192 -45 -105
Profit After Tax -872 -1,127 -1,166 1,164
Key Operating Indicators
PBILDT Margin (%) 3.57 1.26 2.13 16.88
PAT Margin (%) -6.94 -8.45 -9.80 7.72
Interest Coverage
(PBILDT/Interest (times)) 0.43 0.17 0.25 2.63
Source: Published results on Bombay Stock Exchange (consisting of 18 BSE listed entities)

The average realisation of sugar declined from Rs.33.63/kg in H1FY15 to Rs.31.65/kg during H2FY15.
Moreover, sugar mills incur higher operating cost in H2 as compared with H1 as sugarcane crushing begins
October onward and generally end in March. Thus, the declined realisations coupled with higher
operational overheads resulted into reduced PBILDT margins for sugar companies during H2FY15.
In H1FY16, the prices continued to decline and average realisations reached a low of Rs.27.56/kg as
compared with average realisation of 33.63/kg during H1FY15. However, on account of trend of lower

Indian Sugar Industry – From Rags to Riches 5

Ratings

operational overheads during H1, sugar companies managed to earn meager operating margin of 2.13%
during H1FY16.
However, the effect of significant hike in prices during H2FY16 translated into increase in PBILDT margin
from 2.13% during H1FY16 to 16.88% in H2FY16 (almost 1475 bps improvement during H2FY16 against
H2FY15).
The performance of sugar companies has improved in H2FY16 owing to improved realisations on back of
demand-supply gap, remunerative prices for ethanol under EBP and reduction in interest burden which
has translated into better operating profits and net profits. This has further resulted into enhanced
liquidity in hands of sugar entities which has consequently aided in repayment of cane dues and reduced
working capital requirement.
The credit risk profile of the sugar companies is expected to remain stable in the medium term on the
back of envisaged efficient price realisation of sugar and its allied products going forward which is
expected to translate into improved profitability margins, adequate debt coverage indicators and
improvement in the liquidity position.

Industry outlook
SS15-16 witnessed significant recovery of sugar sector both in global and Indian market from gloomy
phase of past two SS of SS13-14 and SS14-15. On the global front, USDA has given better estimates for
SS16-17 with increase in global production from 165 MMT to 169 MMT on the back of increase in sugar
production in top sugar-producing countries like Brazil, European Union and Thailand. However, the
forecasted sugar consumption of 174 MMT is expected to outpace the production levels, resulting in yet
another season of global sugar deficit.
As regards the domestic market, envisage decrease in production of sugar (from about 25.2 MMT in
SS2015-16 to about 23.3 MMT SS2016-17) due to lower area under cultivation for sugarcane during
SS2016-17 (from approximately 5.3 million hectares in SS2015-16 to about 5 million hectares in SS2016-
17), lower opening stock of SS16-17 (about 7.2 MMT) and a steady rise in consumption would further
deplete the closing-stock of sugar. Hence, the sugar price is expected to remain stable providing
reasonably good margins to mill owners. On the other hand, government has introduced measures such
as imposition of stock holding limits at the traders’ end, imposition of export duty of 20%and withdrawal
of excise duty exemption on ethanol supplied for blending in order to keep sugar availability in domestic
market intact.

Indian Sugar Industry – From Rags to Riches 6

Ratings

CARE expects stable outlook for industry in medium-term on the back of favourable developments in
SS15-16, envisaged scenario of consumption outpacing production for SS2016-17 and supportive
measures by the government.
However, continuation of the government policies to regulate sugar sector and actual global as well as
domestic production-consumption patterns would be crucial for ISI during SS16-17.

Rating Dispersion
CARE has outstanding credit ratings (as on March 31, 2016) on 46 sugar mills. Majority of the entities are in
the non-investment grade rating category on account of inherent weakness of low profitability margins,
high working capital intensity of operations, weak debt coverage indicators and seasonal & cyclical nature
of the sugar industry, operating under highly regulated environment.
Rating dispersion of sugar mills rated by CARE

Contact:
Kalpesh Patel Aksha Jain
Senior Manager Analyst
kalpesh.patel@careratings.com aksha.jain@careratings.com
91-079-40265611 91-079-40265644

Disclaimer
This report is preparedby Credit Analysis &Research Limited (CARE Ratings). CARERatings has taken utmost care to ensure accuracy and
objectivity while developing this report based on information available in public domain. However, neither the accuracy nor
completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in
analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE
Ratings has no financial liability whatsoever to the user of this report.

Indian Sugar Industry – From Rags to Riches 7