Sugar mills saw a mixed second-quarter this fiscal as sugar volumes were lower due to restrictions on sales (quota) fixed by the government. But this was offset by higher realisations. However, the sugar industry is undergoing transformation with the introduction of minimum sugar prices (MSP), fixed export quotas and increased ethanol blending.

The Indian Sugar Mills Association estimates sugar production to decline by 20 percent in SS2019-20 (SS = sugar season) and closing stock is estimated to be around 9.5mn tons. The government has set the MSP for the sugar season at Rs 31 per kg and the market price is anywhere between Rs 33 and Rs 34.

The prices are expected to remain strong and above the MSP due to a fall in production levels leading to better realisation and margins for the mills. Higher distillery volumes were aided by the higher lifting of ethanol by oil marketing companies in the second quarter. The power business, though, was impacted by a reduction in power rates.

Sugar Segment

With restrictions on sales imposed by the government, the sugar business was under pressure during the second quarter for most of the mills. The average realisation for the second quarter was at Rs 33.5 per kg. Margins improved with higher realizations in the quarter. Under the current sugar sale quota mechanism, some relief was given to a few companies to sell higher volumes of sugar on account of higher sugar diversion to produce B-Heavy Ethanol and higher export of sugar.

Q2FY20 Sugar biz snapshot

Ethanol Segment

A boost in the ethanol business came after the government hiked prices and OMCs started floating more tenders for purchases. This resulted in higher volumes and realisations. To reduce the buffer stock, ethanol production is the best way out. Cost of producing ethanol is the same as sugar production but due to higher prices, companies make higher profits and margins on its sale.

Sugar mills are seeing improvement in their ethanol segment for the past one year and they remain positive on enhancing earnings from the segment with the new capacities coming up.

Q2FY20 Ethanol business snapshot

The power co-generation business took a hit after power rate cuts in UP, though it is a small part of the business. The cut of Rs 2 per unit has hit the bottom line of big players like Balrampur Chini and Dhampur Sugar. Exports subsidy to help lift higher exports and fulfil the fixed quota allotted by the government will further help earnings and reduce closing inventories.

Outlook

ICICI Direct: With the lower sugar production in Maharashtra and Karnataka, UP based sugar mills would benefit from additional sugar sales volume. Moreover, a reduction in inventory level to 9-10 million tonnes would perk up sugar prices in the next year. Also, the increase of sugarcane diversion towards B heavy ethanol and higher sugar exports, sugar inventories may decline next year leading to better margins and realizations. They have “BUY” Ratings on Dwarikesh Sugar, Dhampur Sugar, Balrampur Chini.