Scaling ethanol capacities to add cheer to credit profile of integrated sugar mills: ICRA

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  • Increased diversion of sucrose for ethanol production following favourable policy initiatives in the form of remunerative pricing for ethanol, interest subvention loans for additional capacities and eased out inter-state ethanol movement may curtail sugar inventory build-up in the medium term
  • Coverage indicators of sugar companies are expected to strengthen in FY2023 with growth in operating profits and cash accruals in addition to sugar inventory reduction and hence working capital debt reduction
  • Continued Government support for the industry remains critical for supporting the profitability of the sugar companies going forward in light of excess sugar stocks, further, there are few related issues that still remains to be addressed

20 July 2021, India: ICRA expects credit profile of integrated sugar mills to witness material improvement in FY2023 aided by improving inventory position and higher profits from higher ethanol supplies post commissioning of enhanced distillery capacities. While higher ethanol sales, especially from B-heavy molasses, would drive the revenues and operating profits expansion, reduced inventory levels would curtail industry’s dependence on borrowings thereby strengthening the coverage metrics of the integrated sugar mills.

Giving more insights, Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA says, “Advancement of Ethanol Blended Petrol-EBP20 along with favourable policies such as remunerative pricing of ethanol, easing of regulations to enable interstate movements as well as relatively relaxed procurement procedures by oil marketing companies has enthused large sugar mills to step up their distillery capacities. The resultant ramp up of ethanol supplies augurs well for the credit profile. We expect reduced inventory levels and thereby lowering borrowings and interest costs; this would meaningfully bolster the credit metrics of the sector from FY2023. The net debt/OPBITDA of ICRA sample of sugar companies would meaningfully moderate to less than 1x in FY2023 from over 2x in FY2021 considering the ethanol supply ramp up.”

Domestic sugar production is expected to increase by 12.7% to 30.9 million MT in SY2021 and outstrip consumption by around 4.9 million MT. The sugar exports are expected at around 7.0 million MT supported by the export incentives and firmed up international sugar prices. Hence, the closing stocks are likely to remain at around 8.6 million MT as on September 30, 2021 (lower than September 30, 2020 levels by 2.1 million MT), which is still higher than normative sugar stock levels of 6.0–6.5 million MT.

Although higher diversion towards ethanol has already started getting reflected positively in revenue and operating profit growth for the industry for the past 3 years, the impact of the same may get amplified from FY 2023 onwards as enhanced distillery capacities start yielding results. In the medium term, favourable policy initiatives towards higher diversion of sugar towards ethanol production, along with occasional sugar exports, is likely substantially reduce the sugar surplus and allow improvement in the demand supply dynamics of the industry on a sustainable basis, thereby supporting the domestic sugar prices. In the current fiscal, however, the revenues and operating margins of sugar companies are likely to remain at similar levels of FY2021 with the benefit of increased cane

diversion towards B-heavy molasses being partly offset by expectations of higher production cost, reduced export subsidy as well as export volume.

Adds Ms. Anupama Arora, Vice President & Sector Head, ICRA, “Given that the subsidy on sugar exports may be permitted only till December 2023 as per the country’s commitment to the WTO, the sugar industry has started diverting the excess sugar towards ethanol with about 2.1 million MT of sugar been estimated to be sacrificed in ongoing SY2021. However, continued Government support for the sugar industry remains critical for supporting the profitability of the sugar companies going forward in light of excess sugar stocks. Even as the favourable policy environment facilitates ethanol supply ramp up, few issues still remain to be addressed such as ramp up of marketing infrastructure, ensure availability of ethanol pan India as well as attend to currently long procedural timelines for approvals for distillery set-up/expansion. Moreover, while interest subvention scheme for distillery capacities has been expanded over the past few years to cover more feedstocks, effective execution of tripartite agreement (among sugar mills, OMCs and bankers) can be a key enabler for higher participation from relatively moderate sized mills that may face challenges in access to finance.”

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