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Despite increase in state advised price, up sugar mills may retain profitability: ICRA

Despite increase in state advised price, up sugar mills may retain profitability: ICRA

 

PUNE: The Rs 25/qtl increase in the Uttar Pradesh (UP) government’s state advised price (SAP) for sugarcane for the season SY2016-07 is likely to result in an increase in the cost of production by around Rs. 2,500/MT of sugar. However, given the likelihood of healthy sugar realisations and sugar recovery rates, ICRA  expects that most UP-based sugar mills, especially the efficient and integrated ones, are likely to be able to absorb the costs and still remain profitable.
Mr Sabyasachi Majumdar, Senior VP, ICRA, said, “We expect sugar prices to remain steady in the next 3-4 quarters, given the domestic and global supply deficit. Further, UP-based sugar mills are likely to continue to derive the benefit from the improved sugar  recovery rates arising out of cane development activities undertaken in the past. Thus, while the UP-based sugar mills may see some reduction in margins compared to what was seen in the previous two quarters, their margins are still likely to remain satisfactory in the near-term. This may be especially true for efficient and forward integrated mills.”
The UP government has, through a November 18, 2016 order, announced a Rs. 25/quintal (qtl) increase in the state-advised price (SAP) of sugarcane for the sugar year (SY) 2016-17 (October-September season). The order raises the cane price for the normal varieties from Rs. 280/qtl in SY2015-16 to Rs. 305/qtl in SY2016-17, and that for  the early maturing varieties from Rs. 290/qtl to Rs. 315/qtl. For the rejected varieties, the SAP has been raised from Rs. 275/qtl to Rs. 300/ qtl. At these prices, ICRA expects the landed cost of cane (inclusive of basic SAP, taxes and levies and inward freight costs) to be around Rs. 321-325/qtl.
According to ICRA’s estimates, with the new cane prices, the cane cost of production for sugar is likely to increase by around Rs. 2500/MT vis-a-vis SY2015-16and stand at around Rs. 28500-30500/MT, given that the recovery rates for most UP-based sugar mills range between 10.5% and 11.5%.
On the positive side however, ICRA expects the UP-based sugar mills to continue to report steady sugar realisations (currently at Rs. 35,500/MT) in the near-term, given the supply deficit, both domestically and globally. This apart, these mills are likely to continue to derive benefits from the relatively healthy recovery rates (estimated at between 10.0-11.5% for most mills in SY2015-16 and SY2016-17 – ICRA projected – as against the sub  10% levels seen in the previous two to three years, on the back of cane development activities undertaken in the recent past, which resulted in better varietal mix. Margins are likely to come down somewhat from the levels seen in the previous two quarters (Apr-Sep 2016) and they are still likely to be satisfactory for most efficient and forward integrated sugar mills over the next two to three quarters.
ICRA, however, notes that for SY 2016-17, mills will have to pay the entire cane price upfront, unlike in SY2015-16, when mills were given the flexibility of paying Rs. 50/quintal (out of the total basic SAP of Rs 280/qtl) within a period of 90 days. This may have some short-term liquidity impact on mills, which are financially weaker and relatively more levered.
 

SOURCE: ECONOMIC TIMES

 

 

 

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