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Article: COVID-19 will hit Indian sugar and ethanol sector
28 May 2020
This extract is taken from an article on our FO Licht
platform dated 27/05/20.
After a stretch of bumper harvests, the sugar industry in India
has reaped a lower crop in 2019/20 with a good recovery on the
cards for 2020/21.
While supplies remained more than ample, the minimum sugar price
has supported the sector, and this is showing in the financial
results. After two lean years, 2019/20 (Apr/Mar) will see the
industry moving back into profit.
The outlook for 2020/21 is less rosy as the country-wide
lockdown as a result of the COVID-19 pandemic has resulted in
considerable demand destruction for sugar and ethanol. This will
directly impact revenue and, as a result, profits.
Lower crop brings little relief
In contrast to the last couple of seasons, the Indian Sugar
Mills Association had little reason to revise its estimates for the
2019/20 season very much. It was clear from the very start that
output would be considerably lower following adverse weather
conditions in Maharashtra.
At the start of the season ISMA expected a crop of around 28.2
mln tonnes, white value, down from 33.2 mln the previous year. This
was then lowered to 26.9 mln tonnes in November following flooding
in Maharashtra. However, this number included about 850,000 tonnes
of sugar diverted to the production of ethanol so that sugar
production for human consumption was 26.0 mln tonnes. In February
this was then lifted again to 26.5 mln tonnes.
By the end of April, net output had reached 25.8 mln tonnes
while the volume of sugar processed into ethanol was about 980,000
tonnes by that date. Total net sugar production can therefore be
estimated at somewhat more than 26 mln tonnes.
However, that would still be above local consumption which will
be badly affected by the country-wide lockdown in the wake of the
COVID-19 crisis.
Rating agency Icra expects demand to fall by at least one
million tonnes as the domestic food industry had stopped
considerable parts of its operations. The report further said that
the sugar mills are unable to fulfil their monthly sales quota
allocated by the government owing to the demand squeeze.
This has resulted in a sugar price decline closer to the minimum
support price (MSP) of INR31 (USD1=INR75.00) per kg from INR32.5
per kg in February.
The drop in sales has consequently led to pressure on the
working capital requirements of sugar mills and thus a rise in cane
dues to farmers, it added.
But not only consumption was negatively impacted by Delhi's
efforts to reign in the pandemic; exports suffered as well.
Before the start of the season, ISMA had targeted 7 mln tonnes
of exports (and eventually set an official export target of 6 mln
tonnes), up from 3.7 mln in 2018/19.
Even before the lockdown, Indian industry officials had cut
2019/20 sugar export estimates to 4.5 mln tonnes as a drop in
prices had made overseas sales unprofitable. This is expected to
fall further as the lockdown has been extended to May 31.
Mills had contracted about 4.2 mln tonnes of exports by the
beginning of May and exports are likely to resume from June-July
2020.
In the meantime, the sugar industry's latest financial reports
reveal that the MSP did a lot to shore up results despite the lower
cane crop.
Company's result will be hit in 2020/21
The 2016/17 deficit on the Indian sugar market proved to be a
short-lived blessing for the country's crisis-ridden industry as
the supply glut in 2017/18 already started to pressure sugar
profits. The situation deteriorated in 2018/19 and hardly any
company escaped unscathed during this cycle.
The 2019/20 season brought considerable relief in the form of
the MSP and the lower crop numbers. This prompted the market price
for sugar to even rise above the MSP for an extended period of
time.
This allowed most milling groups to post solid results in the
first three quarters of the 2019/20 fiscal year and this is not
going to change in the final quarter as the lockdown only started
in April.
Bajaj Hindusthan Ltd., by far the biggest
producer, managed an impressive turn-around in 2019/20. In the nine
months to December 31, 2019, Bajaj posted a profit of INR0.5 bln in
the division against losses of INR4.3 bln in the same period in
2018/19.
At the same time its ethanol profits diminished amid poorer
crushing numbers. They only reached INR0.8 bln against INR2 bln in
the same period a year earlier.
Bajaj Hindusthan operates 14 sugar mills in the state of Uttar
Pradesh where the cane arrears are the highest. Its units have a
combined cane crushing capacity of 136,000 tonnes per day and
alcohol distillation capacity of 800,000 litres per day. Its
cogeneration capabilities amount to 449 MW across 14 mills.
The country's No. 2, Balrampur Chini Mills
Ltd., greatly extended its sugar profits to over INR2 bln
against INR0.9 bln in the same period a year ago.
Ethanol profits dipped slightly to NR1.9 bln from INR2.3
bln.
The company operates 10 mills with a combined daily crushing
capacity of 76,500 tonnes and alcohol production capacity of
520,000 litres per day. Its cogen capacity is 165 MW.
The third-largest sugar producer in the country is
Dhampur Sugar Mills. In 2018/19 its mills put out
799,000 tonnes of sugar while its distilleries manufactured 84 mln
litres. Traditionally it is one of the most profitable sugar
producers and indeed, so far in 2019/20 it managed to generate a
sugar profit of INR0.8 bln against INR0.2 bln in 2018/19.
Its ethanol profit fell from INR1.4 bln to INR0.8 bln.
The company operates five mills with a daily crushing capacity
of 45,500 tonnes while its alcohol plants can produce up to 400,000
litres per day.
The No.4 in the country, Triveni Engineering,
posted a sugar profit of almost INR1.7 bln in the nine months to
December 31, 2019. This compares with earnings of INR0.5 bln in the
same period a year ago. Its ethanol profits remained largely
unchanged reaching INR0.9 bln.
The company operates seven mills with a combined daily crushing
capacity of 61,000 tonnes and alcohol production capacity of
320,000 litres per day.
The No.5 in the sugar market is Avadh Sugar,
part of the Birla Group. Its sugar profits reached almost INR0.8
bln against less than INR0.1 bln a year ago.
This company operates four sugar mills with a combined milling
capacity of 32,000 tonnes per day. Its two distilleries can produce
up to 220,000 litres per day while its cogen capacity is about 80
MW.
That the situation of the industry remains rather difficult was
exemplified by two other heavy-weights in the sugar market.
Shree Renuka Sugars Ltd. posted a sugar loss of
over INR1.5 bln for the three quarters ended December 31, 2019 as
compared to a loss of INR0.3 mln in the same period a year
earlier.
In contrast its ethanol business continued to grow. Here profits
reached INR0.7 bln against INR0.5 bln.
Besides its two coastal refineries the company controls six
sugar mills with a daily crushing capacity of 36,500 tonnes. Its
distillery capacity is 830,000 litres per day of which 630,000 from
molasses and the remainder from rectified spirits.
The only other big sugar company which posted losses in its
sugar business in the first three quarters of 2019/20 was
E.I.D. Parry Ltd. This operator was in the red by
INR1.2 bln against a loss of INR1.9 bln in the same period a year
ago.
E.I.D Parry together with its subsidiaries has nine sugar mills
with the capacity to crush 43,400 tonnes of cane per day, generate
160 MW of power while its four distilleries have the capacity to
produce 234,000 litres per day.
There is a chance that some of the milling groups may avoid
bigger losses in their sugar division this year. However, most
likely they will be unable to repeat this performance in 2019/20.
Therefore, the calls on the government to take immediate actions
will become even more urgent.