Sugar production to increase to 30.5 million tonnes in 2020-21: Ind-Ra

Some companies with weak standalone liquidity have strong parent or group to provide financial support.
India Ratings on Tuesday said it expects sugar production to increase to 30.5 million tonnes in sugar year 2020-21 (SS21). Domestic oversupply to continue in SS21 due to high carryover stocks and an expected increase in production, India Ratings (Ind-Ra) said in a report.

Sugar marketing season runs from October till September.

Ind-Ra said it expects sugar production to increase to 30.5 million tonnes in SS21, factoring in a cane diversion equivalent to 1.5 million tonnes of sugar.

Sugar production for SS20 is estimated to be 27.2 million tonnes.

Meanwhile, the Covid-19 outbreak is likely to result in decline in demand by around 5 per cent in SS20, it said.

The agency expects a gradual resurrection second quarter onwards, with the third and fourth quarter of financial year 2020-21 registering some growth, resulting in an overall decline of around 3 per cent in FY21.

The imposition of fresh lockdowns due to increasing spread of the pandemic, however, remains a key monitorable, it added.

The report also stated that the increase in minimum selling price (MSP) of sugar by Rs 2 per kg is likely to support profitability in second half of FY21, with a potential to increase cash flow of sugar mills by around Rs 5,000 crore.

Along with the cabinet note to increase sugar MSP, the Ministry of Consumer Affairs, Food and Public has floated a note to increase the fair and remunerative price of sugarcane by Rs 10 per quintal to Rs 285 per quintal for SS21, it said.

However, Ind-Ra expects the moves to result in a net improvement in EBITDA margins as realisations should increase by 6-6.5 per cent against an increase of 3.5 per cent in cost, resulting in a net cash inflow of around Rs 2,500 crore.

Further, the report said that most large sugar companies have adequate liquidity with meaningful cash and equivalents, unused working capital lines or easy access to banks or capital markets for funding.

Some companies with weak standalone liquidity have strong parent or group to provide financial support.

Besides, sugar companies would generate cash flows from increase in MSP of sugar in the second half of FY21 onwards.

However, a large number of small and mid-sized companies have a stretched liquidity position, which is likely to have been exacerbated by working capital build-up due to slowdown in sugar or ethanol offtake and stretch in payments from state discoms in the first quarter of FY21.

While the Reserve Bank of India's moratorium on debt servicing will aid these companies till August, liquidity remains a key monitorable, the report added.

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