Export subsidy to expand margins of sugar mills, says Crisil

Representational image.

The Centre's export subsidy for the October-September sugar season 2020-21 (SS21) will help sustain the commodity's exports at almost last year's level, Crisil Ratings said on Monday.

Recently, the Cabinet Committee on Economic Affairs approved export subsidy of Rs 3,500 crore for up to 6 million tonne - around Rs 5.8 per kg - for SS21.

This subsidy together with stable domestic demand, higher contribution from ethanol due to higher cane diversion for ethanol production, and increased ethanol prices, will lead to a 100-200 basis points (bps) increase in the operating margin of sugar mills to 10.5-11.5 per cent this fiscal, the agency said.

These factors will also keep inventory levels for mills almost flattish in SS21, despite sugar production increasing to 30-31 million tonne from 27 million tonne in SS20, a study of 24 Crisil-rated players indicates said.

Besides, debt levels are expected to remain in check, supporting credit profiles.

"Though lower than the Rs 10.4 per kg subsidy announced for SS20, the current subsidy, in tandem with ruling international prices, will help domestic mills cover the cost of production, rendering exports viable," said Anuj Sethi, Senior Director, Crisil Ratings.

Accordingly, Crisil expects export volumes in SS21 to be in the 5-5.5 million tonnes range (5.7 million tonnes in SS20), slightly below the target of 6 million tonnes, due to the smaller export window available.

"Further, a bulk of exports may need to take place by April 2021 given the likelihood of resumption of sugar exports by Brazil," the agency said in a statement.

"In contrast, sugar exports by Indian mills last season continued until September 2020."

In addition, the agency expects domestic consumption in SS21 is likely to sustain at last year's level of 25.5-26 million tonnes due to higher industrial demand, which accounts for 60 per cent of total demand - driven by increased consumption of packaged foods such as biscuits, chocolates and confectionery that contribute over 30 per cent of total industrial demand - and stable household demand.

"Demand from the hotels, restaurant and cafes, however, remains tepid with consumers exercising caution with respect to dining out," the statement said.



(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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