Sugar production is estimated at around 36 million MT for SY2022 (PY: 31.2 million MT) after considering around 3.4 million MT (PY: 2.1 million MT) sugar sacrifices towards juice/B-heavy molasses-based ethanol (15.5% higher than SY2021 despite increased diversion towards ethanol) as per ISMA. However, with domestic consumption estimated at around 27.5 million MT (PY: 26.6 million MT) and exports expected at 10.0 million MT in SY2022 (PY: 7.1 million MT), the closing stock is expected at 6.7 million MT as on September 30, 2022 (PY: 8.2 million MT). This would be equivalent to 2.9 months of consumption (PY: 3.7 months), thereby improving the domestic demand-supply balance compared to the previous season.
Giving more insights, Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA says, "Riding the tailwinds emanating from both firm realisations globally that offer strong export prospects as well as healthy levels of sucrose diversion towards ethanol, the closing inventory for the industry would be much closer to ideal levels by the end of SY2022. However, going forward, higher sucrose diversion towards ethanol would be a sustainable solution to manage sugar inventory levels in the medium term, thereby supporting sugar realisations which would result in both expanded profits and strengthened balance sheets of integrated sugar mills.
Additionally, while India has achieved the 10% ethanol blending target ahead of schedule, timely expansion of sufficient ethanol capacities for adequate supply along with well-time launch and availability of E-20 compliant vehicles remain critical. Also, expansion of dispensation network by OMCs in addition to continued GoI's support with favourable policies will play a key role for meeting for EBP20 timeline."
The revenues of ICRA samples are expected to remain stable in FY2023 supported by elevated sugar as well as ethanol realisations, in addition to expected healthy sugar export (albeit lower than FY2022) and improved ethanol volumes for most of the integrated sugar mills. This will be partially offset by lower domestic sugar volumes for few integrated mills with moderation in inventory levels. However, favourable international demand for sugar exports amidst higher diversion towards ethanol or shortfall in production in Brazil for ongoing crushing season could provide an upside to revenues and profits for the ICRA samples.
Further, improved sugar and ethanol realisations in addition to healthy likely exports and higher sucrose diversion towards ethanol together with the operationalisation of grain-based/dual feed distillery for a few players are expected to support operating margins at 13.0%-14.0% in FY2023 (slightly higher than FY2022 levels). However, it remains vulnerable to cane availability as well as pricing.
Higher diversion towards ethanol coupled with healthy export prospects for SY2022 would result in lower inventory levels going forward which in turn would allow the borrowings of ICRA samples to decline, despite ongoing debt-funded capex plans (for distillery and crushing capacities) for various players. Further, with the accretion of profits, the capital structure and coverage metrics are expected to emerge stronger.
Domestic sugar prices (UP) are currently trending at around Rs. 34.5 - 35.0/kg with higher seasonal demand (in summers), besides closure of crushing activities by most mills for SY2022. Further, global raw sugar prices moderated slightly to US$425/MT in May 2022, after being elevated to US$434/MT in April 2022 compared to around US$421/MT in March 2022 and US$401-407/MT in January-February 2022, amid geo-political tensions with likely greater diversion towards ethanol in Brazil amidst high crude oil prices. However, the prices of white sugar improved to ~US$535-545/MT in March-May 2022 compared to around US$488/MT in February 2022 and reached the highest in the past five years in May 2022.
Adds Ms. Anupama Arora, Vice President & Sector Head, ICRA, "With already few expansions operationalised in the last fiscal, the revenue contribution from distillery division for ICRA sample increased to ~16% in FY2022 from 10% in FY2020. Thisis further likely to increase to 20%-27% over next two fiscals driven by additionally upcoming capacity expansions including grain-based/dual feed distillery for few players. This would allow prices to remain stable as well as reduce seasonality in operations of sugar companies."