JOIN USCoronavirus pandemic may take away sugar mills’ profitability up to 300 basis points
The operating profitability of sugar mills is set to take a hit due to reduction in consumption of sugar, mainly by industrial users, due to the shutdown of manufacturing on account of COVID-19-induced lockdown.
In addition to this, lower demand for ethanol and fall in exports are adding to the trouble for the sugar sector this year. As a result, the operating profits of sugar mills is expected to decline up to 300 basis points for the fiscal 2021, according to rating agency CRISIL Ratings.
Consequently, lower accruals and higher inventory are expected to lead to elevated debt levels and deterioration in the credit metrics of sugar mills, an analysis of 26 CRISIL-rated sugar companies, shows. These mills carry a debt of over Rs 11,000 crore as on March 31, 2020.
Industrial usage of sugar, which accounts for nearly two-thirds of the annual demand of about 26 million tonnes, is expected to have come down as several food manufacturing units -- including soft beverages, chocolates, confectionary, bakeries, hotels, restaurants and cafes -- are either shuttered or running at low capacities. As a result, overall domestic demand is expected to be lower by 1.5-2 million tonnes in the current sugar seas, as reflected in the softening prices over the past few weeks, the rating agency said.
Secondly, oil marketing companies would reduce ethanol off-take because the lockdown has lowered demand for fuel. Besides, they have limited storage capacity available. Production of potable alcohol from ethanol would also be impacted because demand from distillers would have declined.
International sugar prices have also fallen about 23% between January and April as large supplier-nations, including Brazil, are switching from ethanol to sugar due to slack global oil demand and low crude oil prices. Thus, exports from India are likely to remain flattish compared with a 25-30% growth expected earlier.
"The expected decline in operating profitability of millers this fiscal is despite sugar production declining by a fifth in the current sugar season. Sugar millers could thus be looking at operating profitability of 7.5%-9.5% in the current fiscal, down from 9%-12.5% in the last fiscal," said Gautam Shahi, Director, CRISIL Ratings.
India had started the current sugar season (October 1, 2019 to September 30, 2020) with an opening stock of 14.5 million tonnes. However, despite about 20% lower production, the closing inventory is likely to be high at 12.8-14 million tonnes, which is equal to six months' consumption, because of slack industrial demand and exports.
Currently, the government has fixed the minimum selling price of sugar at Rs 31 per kg.
"The current sluggishness in sales due to the pandemic will push up inventories, resulting in elevated debt levels this fiscal. This, coupled with lower profitability, will moderate the ratios of cash accruals to total debt and interest coverage to 0.09 time and 1.6 times for the sample set, from 0.13 time and 2 times, respectively, in fiscal 2020 -- indicating downward pressure on credit metrics," said Kiran Kavala, Associate Director, CRISIL Ratings.