Impact of Export Incentive on Sugar Industry

Industry Overview

India is the second-largest producer of sugar, with an annual production of 32.5 MT in MY 2017-18 (October-September). The industry supports about 5 crore sugarcane farmers (42% of total farming population) across India, and therefore carries high political importance as well. As of MY 2016-17, there are 493 factories in operation with a total sugar production capacity of 34 MT – the major production is from the states of Uttar Pradesh, Maharashtra, and Karnataka.

Of the total capacity in place (production and opening balance), nearly 89% is utilised to meet domestic demand. The per capita consumption is 18.8 kg compared with the global average of 23 kg.

Oversupply and Lack of Alignment between the Cane and Sugar Prices Dragging Industry Down

Despite a strong background, excess supply of sugar in the market has kept the sector under pressure and weakened its financial profile. The surplus has lowered the average selling price, and as a result industry participants continue to delay selling their inventories.

Moreover, the cane price, which is mandated by the government, made a big leap and has grown at a CAGR of 10% during the period MY 2010/11 to MY 2016/17. The usually volatile sugar price, on the other hand, grew at just 3% during the period, putting profitability under pressure. For MY 2017-18, the government further increased the cane price to Rs 255.

Marketing Year (MY) 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Cane price (Rs/quintal) 129.84 139.12 145 170 210 220 230 230
Sugar Price (Rs/quintal) 2951 2727 2951 3148 2917 2492 3121 3620

The rising cane price increases cost of production, but sugar prices are not keeping pace. The growing cost of production for the industry made a huge impact on EBITDA margins and profitability. To calculate the margin and profitability of the industry, the top three firms have been taken into consideration.

Source: ISMA

 

EBITDA

EBITDA Margin

2017-18

2016-17

2015-16

2017-18

2016-17

2015-16

Andhra Sugar

226

228

144

23%

23.5%

15%

Balrampur Chini

479

895

457

11%

25%

16%

Dhampur Sugar

382

537

245

11%

21%

11%

Government Intervention to Improve Financial Health

Recently, the Indian government introduced a few schemes to liquidate surplus stocks and bail out the cash-starved sugar industry.

  • The government made it mandatory for sugar mills to export 5 MT in MY 2018-19. It will be offering a transport subsidy of Rs 1,000/ton to the mills located within 100 km from ports, Rs 2,500/ton for mills beyond 100 km from the port in coastal states, and Rs 3,000/ton for mills located in non-coastal states. Apart from this, the government has doubled the import duty on sugar to 100% and scrapped the 20% export duty.
  • It announced a financial package which includes production assistance of Rs 13.88/quintal of cane crushed for MY 2018-19 from Rs 5.50/quintal this year to help sugar mills clear their dues to sugarcane farmers.
  • In May, the government asked oil marketers to target 10% blending of ethanol with petrol as part of a national policy for biofuels. In September, it hiked the prices of ethanol by about 25%, giving much needed impetus to the industry. Sugarcane ethanol is an alcohol-based fuel produced by the fermentation of sugarcane juice and molasses.

In addition to the above mentioned reforms, the government plans to export 2 MT of raw sugar to China next year. This export push initiative will enable the country to grab market share from more importing countries such as Bangladesh, which needs 2.5-3 MT per annum of raw sugar (currently importing from Brazil). This will also help India narrow its trade deficit.

Stock of Interest

Balrampur Chini Mills

The stock exhibits strong technicals with an Up/Down volume of 1.8, A/D Rating of B+, and improving RS line with an RS Rating of 93. The recent reforms brought much needed cheer for the investor and as a result it spiked more than 90% from its 52-week low of 58.7 (as of November 14).

On October 31, the Company reported its Q2 results. While its revenue from operation fell 18% y/y, both PBT and PAT grew 5% and 10%, respectively. Diluted EPS grew 13% to Rs 3.98.

Andhra Sugars

The stock hit a new high of 484.80 on September 17. However, it failed to sustain that level and breached its key support level at 50- and 200-DMA in subsequent trading sessions. After bottoming out at 301.6, the stock bounced back strongly and retook its 50-DMA on October 30. It is currently trading 8% below its 200-DMA. Its EPS Rank of 71, Up/Down volume of 21, and A/D Rating of A- display strong technical strength.

On November 3, the Company reported its Q2 results. Its revenue from operations fell 18% to Rs 1,015 crore. However, with operating leverage benefit kicking in, its PAT and diluted EPS grew 23% each.

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